A SOFT LANDING HOPEFULLY REMAINS

Continued woes in China means global construction equipment demand is weaker than expected but, for most, the slowdown will be gentle and some markets will grow, says Off-Highway Research

Global construction equipment sales hit a record high in 2021 of almost 1.3 million machines sold. This was across mainstream categories of compact and earthmoving equipment categories, combined with some machine types in the roadbuilding and off-highway materials handling space.

That record volume was driven by the stimulus measures put in place around the world to combat the economic effects of the Covid pandemic. Indeed, it is generally agreed that sales could have been significantly higher were it not for the supply chain constraints and shipping bottlenecks caused by the pandemic.

China was at the forefront of growth in 2021, having put huge stimulus spending in place very quickly in 2020; an echo of the action it took in 2009 in response to the global financial crisis. For most other countries there was growth – mainly in housebuilding thanks to low interest rates – but it was a slower burn.

Excavators account for over 50% of all construction equipment sold worldwide

PHOTO: ADOBE STOCK

The drivers of the previous two years led to a contrasting picture in 2022. In almost all countries of the world apart from China, demand remained red-hot. Sales in the world excluding China grew 7% in 2022, following on from a 19% increase in 2021 in the same territories.

Impact of Covid lockdowns

In contrast, the Chinese market had a miserable year in 2022. Having boomed due to stimulus spending in 2020 and 2021, sales tumbled 39% in 2022 due to the re-imposition of Covid lockdowns in numerous major cities, along with debt defaults and a general reset in the real estate market. The sharp dip in housebuilding was a particularly heavy blow for the construction equipment sector.

Despite the downturn in China, the global equipment market was only down by 2% overall. To put this in a historical context; 2022 still saw the second highest volume of machinery ever sold.

At the start of the year, Off-Highway Research expected the global construction equipment market to decline by 7% this year, following the 8% overall decline seen in 2022. The components of that downturn were continued weakness in China, combined with a gentler slowdown in other major markets.

There’s no doubt that North America was the pick of the major markets in 2022

OFF-HIGHWAY RESEARCH is a management consultancy specialising in the research and analysis of international construction, and agricultural equipment markets, and is the largest of its kind in the world. The consultancy was formed in 1981.

The company offers international research expertise to the construction, earthmoving, mining, industrial and agricultural equipment industries. This specialist capability, offered by offices in the UK, China, India, the US and Japan is available through a combination of subscription services and private client research. It is staffed by industry specialists and is supported by a unique database of information.

Tough times in China

The previous expectation for China was that sales would fall 18% in 2023. A steep drop, but milder than the 39% collapse of 2022. However, the forecast now is for another 40% drop in 2023.

The stimulus spending that was put in place in China in April 2020 burned brightly and briefly for 12-18 months. Equipment sales fell off in the second half of 2021, but the first half of the year had been so strong that the market was up as a whole that year. In 2022, not only was equipment demand on the wane, but the country continued to be dogged by major lockdowns and the real estate sector was reeling following the default of the country’s largest developer, Evergrande.

Although there is strong public investment in China the market is still suffering from weak demand, and weak customer buying confidence. The excess of machines available from the boom in 2020 and 2021 is also something of a barrier to new sales.

As with the stimulus of 2020-21, the public spending that is designed to kick-start the market is being funded by provincial government bond issues. Many of these local governments have strained finances, and the reality on the ground is that payments to contractors are delayed and projects are falling behind.

Similarly in real estate, cashflow is a problem because of the sector’s bad debts and poor credit ratings. There is little appetite to invest in new housing except in the most obviously booming cities.

Sales of equipment will fall, but a ‘soft landing’ is expected

PHOTO: ADOBE STOCK

Off-Highway Research predicts a 7% decline in global sales in 2023

The only bright area is mining, which is going through a fleet replacement cycle in response to high commodity prices.

Steady sales in Europe

Construction equipment sales in Europe rose 4% in 2022, taking sales close to the previous record set in 2007.

Off-Highway Research’s forecast for the region is, essentially, for the market to stabilise at a high level. Although singledigit percentage annual declines in sales are expected for the next three years, the market is forecast to remain above 200,000 units over the medium term.

A slowdown in housebuilding due to rising interest rates represents a threat to compact equipment sales. However, Europe’s infrastructure markets are strong, which should stimulate sales of larger earthmoving equipment.

Strongest performing market

There’s no doubt that North America was the pick of the major markets in 2022, with an 8% increase in sales to take demand to a record high of almost 310,000 machines sold.

Although interest rate rises are having a cooling effect on the booming residential in the last two to three years, the shortfall of housing in the region means this sector is still strong.

Sales might see a modest fall this year, but the market will still enjoy the second highest volumes ever seen. An important point is that although equipment volumes might be down, construction in the region is pivoting towards infrastructure, which will drive sales of heavier (higher value) equipment. So, while the overall number of machines sold might drop, revenues in the segment will rise.

Source: Off-Highway Research

Great potential

The most recent high in the Indian construction equipment industry was in 2018. The market was disrupted in 2019 by the general election, which always causes a downturn in sales due to the legal requirement to suspend the award of public works contracts once the election is announced in case this is used as a mechanism to garner undue favour with voters.

The market sank further in 2020 due to the pandemic and only recovered modestly in 2021 as further Covid variants impacted the country. This continued into 2022 to some extent, but more significant was the impact of inflation, which increased equipment prices and adversely affected the financial viability of projects. As a result, the market only achieved a modest 2% rise in sales last year.

This year should be better. Broad-based growth is expected to resume, with the market forecast to rise 10%. This will be driven by a range of infrastructure investment plans. With a general election due in 2024, this year’s budget has a particularly strong emphasis on investment as Prime Minister Modi seeks a third term in office.

Unfortunately, the election next year will temporarily derail growth and there will be further market-specific disruption due to the introduction of CEV Stage-V emissions laws in April 2024.

However, Off-Highway Research remains bullish about the medium and long-term growth prospects in the Indian market and expects equipment sales to resume their ascent from 2025 onwards.

Japan remains a steady market

Equipment sales in Japan fell 4% last year market which drove compact equipment sales following a strong post-pandemic surge in 2021. As such, the decline is seen as more of a return to normal sales volumes, rather than a cyclical downturn. Indeed, the Japanese market tends to be relatively flat and stable, and generally only experiences single-digit percentage changes from year-to-year.

Dark clouds gather over Shanghai in China – construction equipment sales fell by over a third in the country in 2022 with another large drop for 2023 expected

PHOTO: ADOBE STOCK

Having said that, sales in Japan were constrained last year due to component shortages and long lead times for machines. Some of that pent-up demand is expected to spill over into 2023, helping the market to a 2% rise in sales. Thereafter, the market is expected to stabilise at more normal levels of around 63,000-65,000 unit sales per year.

Source: Off-Highway Research

Rest of the world

Off-Highway Research’s definition of the rest of the world is all countries of the world apart from those specifically named above. Perhaps the biggest positive in 2021 and 2022 was the remarkable growth in this group, which is to say the world’s emerging economies. The boom in commodity prices was the main driver of equipment sales growth in emerging markets in 2021, with many countries seeing their highest sales since the early 2010s. That boom continued into 2022, leading to record volumes of almost 300,000 units sold.

The biggest emerging markets tend to be commodity producers; as a result, equipment sales rise and fall depending on demand for materials and pricing.

Rising commodity prices give producing companies the confidence to renew or expand their fleets. In many countries the major producers are state-owned, so to some extent high commodity prices are essential for investment to balance public finances.

By the same arguments, falling commodity prices tend to lead to falls in equipment sales and these cycles are among the more volatile seen around the world.

The forecast for the rest of the world markets is based on the premise that the current inflationary pressures, exacerbated by the war in Ukraine and its economic repercussions, will keep commodity prices relatively high, but not at the levels seen in 2021 and 2022. Higher interest rates and slower growth are expected to have a more pronounced impact towards the end of this year, cooling sales.

Source: Off-Highway Research

Looking ahead

Off-Highway Research predicts a 7% decline in global sales in 2023, a slightly steeper downturn than envisaged a year previously, due to the weakness of the Chinese market. Stripping China out of the equation, the remaining countries of the world will only see a 5% downturn overall.

It is worth noting that the 2022-2025 downturn can be classified as a soft landing. Only single-digit year-on-year falls in equipment sales are expected, and the volume of machines sold throughout the forecast period should stay above one million units per year. Prior to the current up-swing, such a volume was only achieved twice before.

This year, 2023, is likely to be the sixth consecutive year of annual sales in excess of one million units. When a slowdown in activity comes, excess young equipment could be a barrier to new machine sales, exacerbating the slowdown for the industry.

On the other hand, a prolonged period of historically high volumes is not necessarily a problem. Construction equipment sales always grow worldwide over the long- term as the global population grows and with it the requirement for buildings and infrastructure.

There are also demographic changes which drive the adoption of machinery such as skills shortages and higher wages for manual labour, as well as the retirement of the construction industry’s aging workforce.

iC