RETURNING TO NORMALITYRETURNING TO NORMALITY

Following the unnaturally high sales seen during the pandemic came the decline but now, says Off-Highway Research, a degree of stability is beginning to return to much of the market

Source: Off-Highway Research

Source: Off-Highway Research

The global construction equipment market is still re-adjusting from the unsustainably high sales of the pandemic years. Although volumes around the world are still good, high interest rates are now making it a more painful slowdown than it needs to be.

Pick any country in the world and, at some point between 2021 and 2023, it probably enjoyed record sales of construction equipment. Market conditions continued to be strong for most until at least mid-2023. The main exception was China, which started to turn down sharply in 2022 as the real estate bubble burst.

Troubles in China meant the global market fell 6% in 2022 and 7% in 2023, but it was the only major market with problems at that point. The world – excluding China – reached its high tide market in 2023.

Conditions have now changed. A feature of the pandemic were the stretched supply chains and logistics bottlenecks which meant the supply of almost all physical goods (including construction equipment) could not keep up with demand. That lead to a spike in inflation, and central banks around the world started pushing up interest rates in 2022 and 2023 to combat this fresh problem.

Inflation is now much more under control, and the peak is certainly in the past, but interest rates are only being eased down slowly. One might either take the view that central banks are right to take it slowly given the problems the inflation spike caused, or one might consider them to be old Generals still fighting the last war, when they should be focused on the weak economic growth that is now apparent around the world.

In the context of construction and construction equipment, high interest rates have caused a twofold blow.

Increasing the cost of borrowing has had a direct impact on housebuilding around the world. Despite the fact that many countries have a housing shortage, activity is falling because the higher cost of mortgages has priced some would-be buyers out of the market. The second impact of high interest rates (and the expectation that they will come down in the shortto medium term) is that equipment buyers are putting off purchases until the cost of finance is more reasonable. Both factors might be contributing to a certain amount of pent-up demand for equipment, but if that is the case, the rebound is somewhere on the horizon. For the moment the industry is simply feeling the slowdown.

Country focus

Interest rates and the housing market are certainly the key issues in Europe. This has hit the compact equipment segment particularly hard. Mini excavators are the highest volume product in Europe and their sales are expected to decline 18% in 2024. That equates to more than 15,000 units or half the fall in total equipment sale volumes from 2023 to 2024. Although some improvement is expected in late 2024, equipment sales in Europe are expected to drop 14% this year.

North America enjoyed a third consecutive year of record equipment sales in 2023, with a 6% increase taking the volume of machines sold to 332,396 units.

The market is expected to fall 10% this year, as demand cools following those three sensational years and higher interest rates bite. There was uncertainty ahead of the US presidential election, with buyers holding-off on purchases until the policy agenda for the next four years is clear. With Trump’s victory, the picture becomes clearer.

However, even if sales fall by the 10% forecast, it will still be the third best year in the market’s history in terms of the number of machines sold. Key to this is the fact that the housing market seems to have achieved a soft landing, with the single-family new build segment (both the largest and the most significant for equipment sales) trending upwards again this year after cooling in 2023.

The 7% rise seen in Japan’s equipment market last year was an unusually steep one for the country. It is more common to see demand move by one or two percentage points per year in that market.

There was some hope at the start of the year that the positive momentum from increased spending on public works would be carried over into 2024. However, that has not been the case in the year to date, and the market is expected to be flat as a result.

With its 21% rise in equipment sales, 2023 was the year that the Indian market finally bounced back. The previous high-water mark was in 2018, when sales totalled almost 81,000 units. Demand fell in 2019 due to the disruptive effect of the General Election and the following three years were blighted by the pandemic.

Last year’s steep rise took demand to a record high of nearly 84,000 units, 4% above the previous record volume seen five years earlier. Although this year there was a general election, which always disrupts the market, the downturn was not as long or as deep as anticipated. Another helpful factor is that new engine emission standards will come into force at the start of 2025, which is expected to result in heightened pre-buy activity. As a result, the downturn in the Indian market is forecast to be limited to 6% this year.

South American slump

After strong growth during the pandemic, the construction equipment market in South America declined 21% in 2023 to 48,789 units.

The historic context of this is that the sales achieved in 2022 represented a record high, and a very welcome return to buoyancy for a market which had been unnaturally weak for almost a decade. Brazil is the economic motor of the region and the weakness during the 2010s was due to the paralysis of the country’s construction industry caused by the Petrobras bribery scandal. Even though some of the region’s smaller markets developed well during this period, their growth was not enough to offset the depression in Brazilian construction equipment sales. The forecast for this year is for a 1% increase in sales across the region. Brazil is expected to enjoy a modest rebound and further slight growth is expected in Chile and Peru. Colombia will see a further readjustment back to more sustainable levels, and the only bad news will be in Argentina, where extremely high inflation is expected to pull the market down by more than 40%.

Meanwhile, the Chinese market continues to march to the beat of a different drum, compared to the other equipment markets around the world.

After two years of abnormally high sales in 2020 and 2021 thanks to stimulus spending, the Chinese market collapsed in 2022 with a 39% decline. This was not only due to the stimulus money running out. The impact was compounded by turbulence in the Chinese real estate sector, coupled with the country’s difficulties in getting to grips with the Covid pandemic. A further 38% fall followed in 2023 as the issues of falling prices and mounting bad debts in the real estate segment continued to manifest themselves.

A further 5% decline in sales is expected in 2024, which essentially signifies the market bottoming-out and is arguably the best-case scenario. More bad news and insolvency among property developers could push the equipment market down even further.

Various initiatives are being tried to get the construction market and the economy as a whole back on the path of growth. Air quality and carbon emissions are both big issues in China. In the context of the equipment market, there is a desire to take old, inefficient and polluting machines of the market and replace them with either allelectric equipment or machines at the diesel machines at the highest standard (China IV), using scrappage schemes.

These will help, but the fundamental problems in the real estate sector will take time to fix, and equipment volumes in China will remain unnaturally low (albeit improving) while the issues are worked out.

Elsewhere in the world, commodity prices tend to drive what happens in the market. As a result, equipment sales are slowing from the highs seen in the pandemic years, but volumes are still good.

Add all this together and the global construction equipment market will bottomout this year and next before returning to the growth phase of the cycle. That upswing should take sales back past the records which were set in the pandemic years, but this time in a more sustainable way. iC