New edition of the Sobratema Study of the Brazilian Construction Equipment Market shows that there will be a long way to the recovery, but it has already started
Undoubtedly 2017 was a disappointing year. When almost all people expected a turn or at least a little release after successive drops in sales, last year just gave us more of the same. In other words, a sharper non-stop reduction of construction equipment sales occurred. If—as shown by the popular wisdom—the worst moment announces the arrival of new days, it would be the case of asking if this also works for the construction industry and indirectly for construction machine and equipment manufacturers. The 2017/2018 Market Study shows that there are good reasons to expect a better year. But the scenario also demands much care, since the crisis hit the industry’s nail on the head. And the recovery will not be nor easy nor quick, and will not be evenly distributed among the different categories of equipment. The turmoil hit companies of different sizes in different ways. This indicates that the recovery will not happen with the same speed in all companies.
The year started with a mix of optimism and pessimism, although discredit was higher. In the last survey of 2016 carried out in October by Sobratema with companies that use to buy (or not, according to the situation) construction equipment, 30 percent of the interviewed contractors and rental companies were optimistic about the evolution of their business in 2017. At the same time, half of the group was “pessimist” or “very pessimist”.
Figures showed quickly the situation. At the end of the first half, more than 50 percent of the interviewed companies said that their business volume in 2017 was “worse” or “much worse” than the expected. And the last survey—carried out in October—confirmed the situation.
Even being subtle, the expectation of improvement in the area detected in the last months of 2016 was not privilege of a small group of companies that buy construction equipment. In fact, the 2016/2017 Market Study forecasted a sales increase of approximately 6.6 percent in the Yellow Line and of 8.4 percent in other equipment. It is important to remember that this survey essentially results from an aggregation of expectations of the consulted manufacturers and importers for each category of equipment.
In this sense, the first months of 2017 showed clearly that these forecasts were in check. It was enough to look to the market. The Dealers Group from Sobratema—which gathers companies that together represent approximately two thirds of the national market of the Yellow Line—had already shown this situation. In the first two months of 2017, the Group showed a sales reduction of 33 percent, compared to the same period of 2016. At that moment, the Group’s expectation for 2017 was of increasing in 12 percent the figures of 2016. But the Group showed a reduction of 24 percent in the first half of 2016, hoping in a slightly positive increase (around 1.5 percent) for the entire year. In the survey of October, the Group reported a reduction of 8 percent for the period between January and September (compared to the former year), in addition to a reducing expectation of 17 percent related to 2016, considering the entire year. In other words, there would be a floating performance along the year, but hopes were vanishing quickly.
In October, manufacturers and importers estimated a reduction of 9 percent in the Yellow Line for the entire year. How to explain this difference between dealers and manufacturers, not considering the unavoidable margin of error of both processes? Among the possible influences would be the stock adjustments of the productive chain and a higher expectation from manufacturers and importers directed to get a last quarter more heated than the same period of 2016.
Anyhow, it is interesting to observe the increase of motor grader sales in the table. This is a family of equipment that historically shows sales levels of 25 to 45 percent compared to hydraulic excavators (excluding mini-excavators). And this situation remained till the government gave a hand—through the Ministry of Agrarian Development—to booster the sales of 2014 to the astonishing level of 3580 units, two thirds of the total of hydraulic excavators sold in the same year.
As we know, these machines were distributed for municipalities located in the states’ countryside, mainly to open and maintain local roads, reducing the demand of these machines for private contractors. This coincided with the decrease of investments in federal projects, what reduced sharply the sales to the private area. Motor graders were apparently recovering their share although—it is important to point out—2017 sales were benefited by an order of 90 units given by the state government of Maranhão.
The group Other Equipment increased 5 percent. In this group it is important to follow the performance of aerial platforms. Although being classified by the Market Study as construction equipment, these machines have a wide potential out of construction, in areas such as industry, commerce, urban maintenance and others. Therefore, if platforms were excluded, the group Other Equipment would show a reduction of 12 percent in 2017, compared to 2016, a result quite aligned with equipment of the Yellow Line.
Along 2017, the Group of Dealers also analyzed the impact of the crisis in the industry. In a low-surprising consensus, infrastructure—mainly paving—was identified as the most depressed area of the productive chain. The impact would be lower in the agribusiness, mainly in forestry and sugar cane areas. Mining, in turn, showed some signals of renewed demand in the last months of the year, with reports of significant demand by smaller contractors.
In the period between the beginning of 2013 and the second quarter of 2017, the total GDP was reduced in 4.6 percent. This is called recession. At the same time, “saving” the situation, mining and agribusiness had a positive performance, with a strong recovery in the last quarters. But in construction the GDP had a sharp reduction of 12.6 percent and unhappily got the “disaster”. On the other hand, considering the answers of the Group of Dealers, the year of 2017 marked the end of the era of resignations that was hitting the industry since the cooling of the crisis, although any movement of re-hiring still depends on a more effective recovery, not just on the “end of bleeding”.
The year also showed an apprehension that does not inhibit and certainly impacts any perspective of recovery in new equipment sales: the large idle fleet. Based on the answers of 30 contractors and rental companies heard in October, the simple average of the idle fleet as a percent of the entire fleet was currently of 50.4 percent. In other words, companies have one equipment waiting for use for each machine that is working. This is a very bad scenario but the weighted average—that considers the size of each fleet—is even worse: 56.9 percent. This suggests that the problem would be more serious in the fleets of large contractors. In fact, smaller companies are reacting more effectively to the crisis, eventually selling or bringing back equipment (this way reducing the size of their fleets) and—in other moment—buying used equipment by very attractive prices. Meanwhile, larger companies would not sell so many assets and some of them would even have legal problems to do that.
Less impacted by the drop of investment in large projects of infrastructure, smaller companies would also take benefit of the small contracts that continue to be offered, even in a recessive market. They also benefited from lower direct and indirect costs, favoring competitiveness. In addition, smaller companies were not so affected by the investigations of Lava Jato.