By Chris Sleight
Having reached a peak in 2021, the global construction equipment market sagged in 2022 due to the collapse of demand in China, and it will decline again in 2023 as the effects of inflation and rising interest rates bite in other parts of the world.
Although falling demand is never good news, volumes will remain at historically high levels, and a slowdown could provide the market a chance to reset after two frantic years where supply has fallen badly behind demand from customers.
The recent low point for construction equipment sales came in mid-2020 at the start of the global pandemic, with sales rebounding sharply thereafter. That growth continued unabated throughout 2021 in all major markets except China. This saw global construction equipment sales rise 11% in 2021 to a record high of 1.28 million units, an increase of 125 000 machines compared to the previous year.
This rise came despite a modest decline in China, which peaked in 2020 in response to stimulus spending. Growth in the world, excluding China, in 2021 was 20%.
There were three fundamental drivers in 2021. First, the extraordinarily low interest rates which were put in place at the start of the pandemic were a strong positive for the residential building market.
Second was stimulus spending and other infrastructure investment by governments around the world. Although it is debatable to what extent these plans contained genuinely new projects, and to what extent activity got underway in 2021, the announcement of plans alone was enough to reassure contractors and rental companies that there was a reliable pipeline of work ahead. This in turn gave them confidence to invest in new equipment.
Third were the high commodity prices which developed from late 2020, and which have since been pushed to even higher levels by the economic fallout from Russa’s invasion of Ukraine. High prices encourage commodity producing countries to invest in their fleets – either to renew aging machines or to increase production and benefit from the higher prices for the materials they produce.
However, all these positives pushed demand for equipment beyond what could be met by the industry in 2021. In the second half of 2020, production of construction equipment was slow to restart due to component supply issues and the length and complexity of supply chains. As has been widely reported, this problem was by no means limited to construction equipment – it was a phenomenon which impacted on almost all manufactured goods.
Supply chain issues
These problems were exacerbated by issues in the global shipping, transportation and logistics segments. This resulted in not only shipping delays, but a scarcity of shipping capacity which pushed prices sharply upwards. The problem is twofold. Manufacturers rely on transportation networks to deliver the components they need to build products. They then need those same networks to get products to customers.
Again, this has impacted on many types of manufactured goods, and the construction equipment segment has been no exception. Lead times for new machines remain extremely long and prices continue to rise as manufacturers pass on their input cost increases to customers.
The positives which took demand to new highs in 2021 are to some extent now coming back to bite us. Sales in China were extraordinarily high in 2020 and 2021 thanks to stimulus spending, but the market crashed in 2022. Although the end of the brief stimulus boom was one reason for this, more pertinent were the reintroduction of Covid lockdowns and turbulence in the Chinese real estate segment.
Last year saw the Chinese government announce more stimulus to try to kick start its economy, but the issues faced by the construction equipment segment are not likely to be solved by this. The real estate sector needs time to restructure its debts and for property prices to start rising again. Even when this happens, the large population of young machines in the market from the 2020-21 stimulus will be a barrier to new sales.
Elsewhere in the world, 2022 is likely to have been the peak post-stimulus year and equipment sales will fall in 2023. At any other time, the headwinds of high inflation and sharply rising interest rates would cause a crash, but Off-Highway Research believes there is reason to be hopeful for a soft landing.
In major markets such as Europe and North America, high demand and long lead times for the last two years have meant the peak of 2021 extended into 2022 and now looks set to continue into 2023 as OEMs do the best they can in the face of shortages and shipping problems to fulfil unprecedented order backlogs.
There is uncertainty about the outlook once these backlogs are worked out. However, infrastructure investment remains strong in a number of major markets, and the long-term nature of these projects is helpful in providing stability and predictability in equipment sales, particularly some of the heavier types. More at risk is residential building, which has a much greater bearing on sales of compact equipment. This is an area where sharp interest rate rises can very quickly slow activity. It is also an area which has arguably overheated since mid-2020 due to ultra-low interest rates and the move to home working encouraging people to extend their properties or move to bigger houses.
A word of caution
This all of course comes with the caveat that we live in strange and unpredictable times. War in Europe, high global inflation and sharp rises in interest rates after 13 years of almost free money all happened in 2022. Their impact will continue to resonate this year and who knows what’s round the next bend.
So, while Off-Highway Research is forecasting a soft landing for equipment sales in 2023, that could be revised with changing economic and geopolitical factors.