Looking Ahead
Recent trends in the price of construction machinery and equipment are forecast to largely carry over to the next three years. IBISWorld forecasts that grader, front-end loader and bulldozer prices will rise at an annualized rate of 3.1% during the period, which is similar to price growth experience over the past three years. Also, suppliers’ production capacity is expected to remain relatively constant as a result of pent- up demand for machinery and wider use of rental equipment. ME
Despite a strong dollar dampening sales, Caterpillar has attracted cost-conscious customers who would rather lease or rent construction equipment than buy it outright.
From 2008 to 2011, the number of commercial building establishments in the US contracted 3.9%, coinciding with an overall revenue decline of 52.7% for those companies. Consequently, construction companies have since adopted policies that help stabilize their balance sheets. Renting par- tially absolves construction firms from revenue-related risks because they can avoid incurring liabilities on the balance sheet. Healthier balance sheets also make it easier for a con- struction firm to obtain a credit line, should it require one. The availability of rental options strengthens an equipment buyer’s position in negotiations and helps mitigate price growth of new machinery. In the three years to 2014, IBISWorld estimates that revenue from heavy equipment rental grew 5.2% per year on average, indicating contractors’ increasing preference for renting over buying.
During the next three years, trends in long-term interest rates will encourage many equipment users to rent rather than buy. Many buyers lack the available capital to purchase heavy construction equipment outright and instead choose to finance. While quantitative easing has kept interest rates relatively low during the past few years, the Federal Reserve is forecast to increase rates at some point in the next few years, effectively increasing the attractiveness of renting. Consequently, sales volume will be somewhat subdued, so manufacturers may scale down regional production quantity, much like Caterpillar has in response to faltering demand from Pacific markets.
Kiera Outlaw and Kevin Young are business research analysts for IBISWorld’s Procurement division. They specialize in research regarding price trends, major suppliers, supply chain risk and more.
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October 2014 |
ManufacturingEngineeringMedia.com 93
Photo courtesy Caterpillar
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