Construction companies and rental firms bought tons of iron this year, giving vendors little chance to come up for air. "The good news is that Im sold out," says one manufacturing executive. "The bad news: Im sold out."
A slower rate of growth next year is expected to bring welcome relief. General equipment will be more available but larger machines will remain in short supply until 2007. "We are in the fourth
or fifth inning of the ball game," says Charles Rentschler, an investment analyst with Foresight Research Solutions, Oak Park, Ill.
Vendors love the explosive demand, but low inventories for tires, steel castings and other components have them "in a bit of a scramble mode," said Jim Owens, chairman of Caterpillar Inc., during a recent analyst meeting. Suppliers added little capacity after the market bottomed out in 2002. "Everyone is gun-shy about building inventory," says Glen E. Tellock, president of Manitowoc Crane Group, Manitowoc, Wis.
Tellock spoke to other machinery executives at the Association of Equipment Manufacturers annual meeting, held Nov. 6-9 in Tucson, Ariz. Later that week, Chevron Corp. hosted a construction symposium, where some of the countrys top equipment managers grumbled about the tight supplies and other issues. "Availability is challenging many products right now," said James Renfro, procurement chief for Hanson Building Materials, Irving, Texas.
AEM forecasts U.S. sales to rise 9.3% in 2006, following this years 13.9%. Vendors agree that 2006 "looks to be a good year," says J. Neal Ferry, executive vice president of Astec Industries Inc. Others warn a downturn may come in 2007. Mining operators have locked up much of todays new heavy machinery. Contractors needing haul trucks, excavators and crushers may have to wait another year or turn to bottom-rung suppliers.
Chuno Ma, president of Hyundai Construction Equipment, Elk Grove, Ill., says the firms low-priced equipment picked up market share this year, selling 40% more excavators than in 2004. Ma sees another 15% growth next year. "I dont think the special demand for [Hurricane] Katrina will be solved within the year," he says. Hyundai can ship U.S. inventory in about four weeks, Ma says.
Until this year, sales of crawler cranes were dragging, but crane builders believe that 2006 will be even better than 2005. AEM says lift equipment will outperform all other categories next year, with 18% growth. Global demand is a factor.
"The thing we have going now that we didnt have before is the international markets," Tellock says. Since its acquisition of tower crane maker Potain in 2001, Manitowoc has a strong foothold in China. Transportation and energy legislation also will spur demand at home, he adds.
It is therefore not a surprise that rental rates are on the move. They gained 8% in 2004, 8% in 2005 and are expected to move another 5% next year, according to Daniel Kaplan, a rental industry consultant in Morristown, N.J. Used equipment is getting scarce, too, and producers continue to raise prices on new machines. Caterpillar, which leads global pricing, has a 1 to 5% increase coming in January. The Peoria, Ill., supplier plans to grow this years estimated revenue of $36 billion to $50 billion by 2010.
Some doubt the machinery sectors ability to keep growing at such a rapid pace. Cats targets "do not appear to factor in a U.S. recession or a major global economic slowdown," says Andrew Obin, a Merrill Lynch analyst in New York. But vendors are bullish. "Weve got a very strong order backlog," Owens says.