Following four years of financial drought, major plant
manufacturers are producing stock again, but outside Europe demand
is focused on older used machinery, says Jonnie Keys.
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New stock levels are still low and market demand is
manifested in a levelling of prices across Europe – and even with
stocks available, many buyers are unwilling to purchase large
fleets.
The cost of new equipment is up 20%
on June 2009 and the second-hand market is getting stronger,
reviving demand for good used equipment across the globe.
In mid to late-2011, regardless of
make, model and year, prices strengthened for late-used and
nearly-new equipment, with the strongest rallying in the 12 to
24-month class.
Now, in 2012, the trend, that is
predicted to continue, is that interest in older machines and
equipment in the 24 to 48-month class is the next focus on the
‘wish list’ as market stocks deplete. But what has caused this?
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By GlobalDataDuring the past 36 months, Euro
Auctions has repeatedly witnessed more than 50% of all plant sold
at auction in the UK and continental Europe leave the northern
hemisphere for projects down under, and that doesn’t necessarily
just mean Australia.
With many large post-Olympic
construction projects about to commence in the UK, including the
first new bridge over the River Thames for over 20 years, current
UK stocks of plant are less likely to stand idle, but it will not
completely revive the market.
Equipment leaving the
UK
So, with a heavy heart,
strengthening economies around the globe will ensure machinery from
Europe will continue to leave for BRICs countries, Australia,
South-East Asia, South America and the US.
World production from companies
like Caterpillar, JCB, Doosan, Volvo, Terex and many others has
been slow to reignite and, like water finding its own level, used
plant and machinery stocks have washed up where they are most
needed from places where there is no work for them.
Large global infrastructure
projects are fuelling demand for all types of plant and machinery,
regardless of make and model.
In South America, infrastructure
projects in excess of $100bn (€76bn) are under way, including the
construction of more than 5,000 km of Brazilian highways. Major
transport initiatives worth an estimated $30bn are under way in
Columbia; and Peru is embarking on hydrocarbon mining, rail and
agricultural projects. The increased price and low stocks of new
plant and equipment means late-model, low-hours, and clean heavy
earth-moving equipment is in demand in South America and will
continue to be so for some time.
Due to the natural disasters of
early 2011, Japan hit a manufacturing all-time low which affected
the supply of key components to a raft of manufacturing names
across the globe. Changing standards and emission regulations are
also having an impact on new model supply and sales, plus, in time,
these will impact the used market in various ways as they start to
filter through the system.
Australia is mining everything it
can to meet demand for raw materials from the Far East, resulting
in the need for heavy excavating, earth-moving and crushing
machinery.
Australia is sourcing as much
equipment down under as is possible, continuing the trend for
late-year, low-hours heavy earth-moving and mining equipment, with
Volvo, Komatsu, CAT and JCB being the preferred makes.
Dealers unable to purchase new
machines from manufacturers are now sourcing machines at auction,
either for stock, or to meet the requirements of current clients.
With 12 to 24-month-old stocks depleting, buyers are now interested
in stock from 24 to 48-months-old.
Once the route for disposal of
ex-hire equipment, hire companies are now replenishing stocks from
auction and also hanging on to plant for much longer that
previously was the norm. We have also seen this trend continue in
Europe, where certain countries that historically bought new
through dealerships now favour buying recent low-hour machines.
With popularity in the second hand equipment market now favouring
older models, funding may now be fast becoming an issue. What are
the pressures on lessors to fund these purchases and at what
cost?
Market becoming more
difficult?
Is the market becoming more
difficult to provide finance to? Robert Keep from leasing and
finance specialist Norton Folgate says: “There are two primary
issues to consider. First, the matching of UK market asset values
to prices that equipment is actually selling for. Typically an
underwriter will look at the UK market to find out what equipment
is actually worth locally. Any disparity may result in the
underwriter requesting a larger deposit in a deal – and for many
businesses that are trying to hang on to cash this will be less
than palatable.
“In many recent cases this has
resulted in the lessee being forced to leave the deal on the table,
even though the lessor has the appetite for the transaction, albeit
with the larger deposit requirement. Secondly, the asset base of
finance companies’ portfolios may be inappropriately skewed through
lending on older machinery.
“In the past three to five years,
the proportion of used plant to new plant in a finance company’s
portfolio has been changing, with the proportion of used equipment
increasing. With used plant proportions on the increase this is
likely to shorten lease terms, which in turn is likely to reduce
the embedded income in the portfolio.
“The result being that many lenders
now have to work harder to facilitate more deals in order to
maintain embedded value.”
A further concern in the current
market is that if manufacturing returns to pre-recessionary
volumes, and new equipment again swells the markets stock holding,
what will happen to the price and intrinsic value of used
equipment?
One can only speculate on that
scenario. This is perhaps a consideration for another day, but if
it unfolds negatively, transactions that lessors believed were
asset secure may well turn out not to be.
Jonnie Keys is general manager at Euro Auctions
