Material Handling Equipment Focus - In the Market

Like a punch-drunk boxer, the heavy equipment market is reeling. It has
taken a lot of body blows since 1999 and is perceiving 2003 as a
"neutral corner" where it can recover its breath and come out fighting
in 2004. That is good news for recyclers. It means new equipment dealers are hot to bargain. A recycler with a shopping list is as popular at the equipment dealership as an Olympic champion with a good left hook.

But while the market for general-purpose heavy equipment may be favorable, the buoyant scrap market of 2003 has raised the demand for scrap-specific machines to a much higher level.

MIXED MESSAGES. "If you’re looking for a 3- or 4-cubic-yard wheel loader, this is probably a good time to buy," says Chuck Yengst, president of Yengst Associates, Wilton, Conn. (www.yengstassociates.com). Yengst is the U.S. arm of Off-Highway Research, a U.K.-based consulting firm that specializes in research on the kinds of heavy equipment used by recyclers, contractors and renters.

"Equipment prices are not escalating. We’re still at the level of demand that can be met easily by what manufacturers are putting out the door," Yengst continues. That is good news for buyers.

Take the wheel loader market, for example. The market for all sizes has dropped since 17,500 units were sold in 1999, hitting the canvas with 13,250 in 2002. Take away 25 percent of anyone’s business, and they will be anxious to make a deal.

Just as other indicators like the stock market are showing new life, the recycling equipment market also seems to be turning a corner. Some manufacturers report strong sales already. "It’s been very strong all year, and it’s continuing into the fourth quarter," says Tom Skodack, factory distributor for Fuchs U.S.A., Wilmington, N.C. "We expect the market to be strong into next year."

He says the resurgence in business started in 2002. Fuchs U.S.A. sold 60 units last year and 90 already this year. "We could sell more," Skodack believes, "except we cannot get the equipment."

Pete McAvoy at Industrial Metal Recycling (IMR), Oakland, Maine, is one of the reasons Fuchs’ sales are up. IMR has purchased five hydraulic scrap handling units in the past couple of years, including three 350s, along with a 630-ton Sierra shear.

"The lower the prices (of scrap), the more you need to be efficient," McAvoy says. That means using the latest equipment. "If new equipment can save you $5 per ton in processing, that’s a huge deal."

Ferrous Processing & Trading of Detroit, Mich., also has been buying. "We budgeted for six cranes and four loaders," says Tony Benacquisto, executive vice president of operations. "They were offering better prices than we’ve seen in quite a while. You can wheel and deal."

Howard Glick, president of Tri-State Iron & Metal, Texarkana, Ark., is another recycler who has been buying. "We bought a new hydraulic scrap handler and a new baler (a Harris Auto-Tie)," Glick says.

While it was not a "steal," he did not feel taken, either. "In any purchase like this there is always some negotiating," Glick says. "We ended up in between." Whether the market is in an up or down cycle was not a consideration. "We buy when we need new equipment," he says.

Indeed, that seems typical of the recyclers across the nation. "Buyers are not replacing whole fleets. They are filling holes or gaps in their equipment," says Terry Erickson, territory manager for Michigan Cat in Wixom, Mich. A large part of the dealership’s customer base consists of recyclers, and he notes that recyclers tend to be among the most educated and informed buyers in the business. They’ll walk away from a deal unless they perceive it as favorable, he says. Still, recyclers are buying. September was a good month and he says he expects the strong trend of sales to continue through the fourth quarter.

"There is a tremendous amount of pent-up demand," says Erickson. "There has been a lot of use put on machines over the past three years. Recyclers have put off purchasing new equipment because the scrap prices were not that great. But they continued to put hours on those machines."

Things are going so well for LBX Co., Lexington Ky., that it is bringing out a new material handler, the 125,000-pound 600 model, which replaces the 600Q. "We’re also increasing our investment at ISRI," says Scott Sutherland, product development manager for LBX, concerning the annual convention of the Institute of Scrap Recycling Industries Inc.

Like most other dealers, he reports a strong year. "We expect that to continue into 2004," Sutherland says. "Even with all the new European players, there is enough business to go around."

"This year has been better," agrees Constantino Lannes, president of Sennebogen N.A., Charlotte, N.C., one of the "European players" Sutherland alluded to. Sennebogen has seen business increase about 5 percent in the past year. "It’s still a price fight," he notes. "[But] things are much better this year than before."

MARKET SEGMENTS. Market demand varies by equipment type and size. Researchers like Off-Highway Research draw the line between large and small units at 80 hp.

The compact unit sales peaked in 2000 and followed the large equipment market down in 2001 and 2002. In fact, it was not recycling or construction that drove the small equipment market, but rather rental equipment buyers who had placed orders that were still being filled.

Caterpillar Inc., Peoria, Ill., stands as a leader in the larger wheel loader sector, with about one-third of the market. Cat has maintained that position for at least 15 years. Deere is jostling with Komatsu for second place, both with 18 percent to 20 percent of the market. Volvo maintains an 8 percent or 9 percent market share and Case is next at 8 percent. However, many lightweights are in the ring—there are 27 producers in this market, alone.

Imports and exports are about a wash. While the U.S. imports a lot of equipment—mainly from Japan and Europe—it also exports a couple thousand machines annually.

For most types of equipment, there is also a flourishing used equipment market with which to compete.

Manufacturers like Skodack see the used market as "a mixed bag." He says he sees strong demand for used machines. "We don’t have any problem moving used," he says.

Yengst follows the auction market and is surprised at the number of fairly new machines that are coming on the block. "Machines one or two years old are coming to auction. Sometimes three or four buyers are interested. Other times, you can get a machine for a real bargain," Yengst says. He says it is not unusual for a four- or five-year-old machine to be sold at 60-70 percent below new equipment list. "If it’s a two- to four-year-old machine, you still have multiple years of life left."

This puts pressure on dealers to move used equipment. "The market for new equipment would be much higher without that glut of good, used equipment," Yengst says.

Skodack says a substantial flow of used equipment out of Europe competes with the new market. "For us, it’s good news and bad news—but it means there are more Fuchs machines in the field."

John Deere recently upgraded its used equipment Web site to provide access to every John Deere dealer’s used equipment inventory, including attachments. (See sidebar.) In addition to equipment and model number, shoppers can search by age, hours and condition.

Not all recyclers are interested in used equipment. "We’ve bought used before," Glick says. "But we don’t usually. We’re in this for the long-haul." In addition to not buying someone else’s problems, Glick says new equipment is quite affordable. "As cheap as interest rates are, it’s worth putting the pencil to every deal."

Benacquisto of FPT would agree. "I’ve learned my lesson with used equipment," he says, although he will purchase loaders through Caterpillar Inc.’s certified rebuild program, because they provide a completely rebuilt machine with new numbers and warranty.

DOWN THE ROAD. While manufacturers like LBX Co. see a competitive market, Sutherland credits it more to the number of players in the field than to the economy. "There is never a deal we go into solo," he says. "You always have to be price-competitive and give more bang for the buck."

"I expect a slightly better year next year than this year," says Sennebogen’s Lannes. He credits his optimism to a mix of general market improvement and the tax incentives available to buyers. "The market is getting better," Lannes says.

"There were some bargains last year, but right now it seems prices are heating up," says McAvoy. He notes that the current tax incentives are a huge motivator to buy equipment.

"If you anticipate making a profit next year, the tax incentives make it a good time to buy machinery," McAvoy says.

Erickson of Michigan Cat sees a number of his customers thinking the same way. "People are busy. With the low interest rates and the new depreciation tax credit laws, people are looking at buying again," he says. His crystal ball is cloudy, but Erickson says he hopes 2004 will provide a continuation of the upswing in Q4 of 2003.

Scrap prices and the health of the market will dictate where equipment sales continue to grow. Erickson says his region lives and dies on heavy manufacturing. "Scrap markets have a lot to do with the economy, and the economy has a lot to do with politics," he says.

Recyclers look at it from the other side of the coin, of course. They want to buy while equipment dealers are hungry and before the manufacturers kick in price hikes.

"It will be 2005 before we see some real price increases," Yengst predicts. Although he expects modest increases in 2004, he expects manufacturers will do whatever it takes to make pricing palatable and help their local dealers move equipment.

"Cat will raise prices 1.5 percent or 2 percent no matter what," Yengst continues. "The question is whether those increases will stick. I think they will give it up to their dealers."

Yengst looks for 2004 to be a better sales year both for small and large capacity wheel loaders. "Sales will be up 8 [percent] to 10 percent both in small and large units," he says, but adds, "That is not a whole lot of change."

Still he expects a fair amount of pent-up demand from a market where things have not been too prosperous lately. Yengst says he expects the overall economy to improve in the next 12 to 18 months, giving equipment sales a second wind.

Skodack says all sales come with the usual negotiation. "But we’re not getting our throats cut. The bargaining is under control."

The bottom line: buyers probably have a window of several months to get a bargain in heavy equipment. The used market is active and cheap. But do your buying before the latter part of 2004. When the economy does turn around, manufacturers will look to make up lost ground, and prices could bounce back from the mat just like Rocky.

The author is a Recycling Today contributing editor and can be contacted at curt@curtharler.com.