A survey of ENR’s Top 600 Specialty Contractors this fall reveals significant price inflation for heavy equipment and commercial vehicles over the past five years. Some respondents attribute the change to higher costs associated with equipping diesel engines with the latest emission controls.
Of the 519 responding firms, nearly 92% reported facing higher purchase prices since 2010. More than two-thirds said prices were up as much as 20%.
When asked what was causing the change in prices, many respondents noted that they believed the economy was in a stronger condition than in 2010 and that technology and emission controls needed to make U.S. machines compliant with an Environmental Protection Agency mandate known as Tier-4 was also to blame.
“Increased work in the construction industry has caused an increase in demand for equipment, so manufacturers can charge more,” said one respondent.
“Inflation, supply and demand, increased technology and more ‘frills,'” said another.
“Tier updates in the the last five years, plus increased demand,” another noted. The Top 600 respondents’ fleet sizes ranged from a few pieces of equipment worth tens of thousands of dollars to more than $2 billion in inventory.
The survey data tracks with the Producer Price Index charts for machinery and equipment. Preliminary PPI figures for October show prices up more than 1% since a year ago and more than 13% since October 2010.
However, when drilling down into specific product categories, the inflation effect is even more pronounced, experts say.
“We believe most of the increases are related to the additional costs manufacturers have incurred to conform to EPA emission regulations,” said Frank Manfredi, an equipment analyst, in his Machinery Outlook newsletter this fall. “January 2015 was the date for engines to conform to the Tier-4 final regulations. Most manufacturers steadily increased prices over the eight-year period to avoid ‘sticker shock’ among buyers."
Equipment prices have increased even as raw-material costs have remained “relatively benign,” Manfredi noted. PPI tables for metals and metal products show a decrease of nearly 12% in the past five years, while the price of diesel fuel likewise dropped more than 28%.
Rouse Asset Services, whose clients are mostly in the general rental business with typical machines costing $140,000 or less, also pegs inflation on economic recovery and Tier-4 emissions controls.
Manufacturers "experienced a drop off in sales in 2009-10, causing them to delay pushing through normal price bumps. As a result, there's a bit of a 'catch-up' factor," says Brian Cohen, vice president at Rouse. "Tier-4 has definitely had an impact as well, particularly for air compressors and generators." Purchase prices have climbed as much as 25% since 2007, Rouse reports.
ENR's Top 600 company rankings cut across a wide swath of the construction equipment marketplace, with specialty contractors in such fields as scaffolding, electrical work, foundation drilling, concrete, masonry and other trades.
On the commercial vehicle side, some ENR Top 600 respondents noted that the trend from manufacturers switching from body-on-frame service vans, such as the Ford Econoline, to taller, unibody vans, such as the Ford Transit, has contributed to some price increases, as well.
The inflationary effects could limit fleet owners’ purchasing power and encourage them to hold onto machines longer, experts say. Additionally, the latest clean-diesel machines, with their added maintenance costs, may lead more contractors to rent or lease rather than buy.
“We believe the high prices coupled with the higher expenses of operating Tier-4 engines—fuel, diesel exhaust fluid, more frequent filter changes—has shaved off as much as 5% demand per year for the past couple of years,” Manfredi said.
On the flip side, equipment owners receive tangible benefits from the latest clean-diesel engines. For example, selective-catalytic reduction on heavy-duty trucks and large off-road equipment allows diesel engines to reduce harmful emissions of nitrogen oxides while increasing fuel economy by 3% to 5% over prior models, according to the trade group Diesel Technology Forum.
ENR will take a closer look at equipment costs and forecasts in the December 21-28 issue containing the Fourth Quarterly Cost Report.