Cautious Optimism Continues Into 2012

Posted by IronPlanet on Dec 21, 2011 1:13:39 AM

Pockets of Opportunity Remain; Good Business Management is Key

After a very difficult few years, things are looking up.

The “Great Correction” that the country has been enduring the past few years was, unfortunately, inevitable. Too many consumers and businesses were over-exuberant for too long, relying on unsustainable profits and credit to drive their personal and corporate aspirations. While this isn’t news by any stretch, it does continue to drive how the economy rebounds and how that growth will progress for the coming years.

Things are getting better. Growth, however, will take a more measured pace than we became accustomed to in the 1980s and ‘90s. No, we don’t foresee a post-recession building boom as in years past, but we do see some great pockets of opportunity both in terms of industries, geographies, and improved operational efficiencies.

A Return to Normalcy
There was so much construction equipment in the United States five and six years ago that, with the domestic and global economic slowdowns, it’s taken three years for supply and demand to finally meet again. This oversupply began in 2008, peaked in 2009, and continued through 2010.

From the financial services side, the supply side of construction equipment tapered off enough in 2011 that we saw prices of used equipment stabilize and, in the case of some late model equipment, improve. We expect that trend will continue in 2012, especially for late model equipment in good condition.

Yes, the economy and the construction industry are headed in the right direction.

The double-dip recession that some pundits like to speculate about is not likely, but it will take longer than most of us would like for the economy to recover.

Equipment Inventory Management Is Key
Construction companies are adjusting their approach to fleet management to better optimize budgets while mitigating exposure, keeping equipment longer and relying more on leasing companies to fill their equipment needs.

Equipment also is being kept longer. The old norm of putting 2,000 to 3,000 hours on a piece of equipment before its turned has now doubled, and if a unit isn’t being utilized as much as it could be chances are much greater it will be sold to reduce overhead instead of waiting for the next job.

In this economic environment, selling that equipment is good business for everyone. The construction company carries less liability on their books and the leasing companies have more units to service. A lot of businesses have turned to leasing instead of buying equipment.

The bonds between contractors and leasing companies have therefore grown stronger. Contractors are relying on leasing companies more and, because there are fewer stable contractors, leasing companies are making more attractive terms available to them. There is more emphasis on long-standing relationships, and we believe this willingness to work together will continue.

Pockets of Opportunity
There is always a growth opportunity, it’s just a matter of finding it.

We’re far enough into the market correction that the price of used equipment has stabilized and some cases increased. If you have underutilized equipment that can come off your books, give serious consideration to reducing your liability and turning that equipment into positive cash flow. This is especially true for low hour 2007 model year and later equipment.

The oil and gas and mining industries are both doing well. North Dakota is one area that is getting a lot of attention because their local economy is booming thanks to the oil and gas industry being previously underutilized. If you’re a contractor or leasing company in the southeast who is dealing with a challenging business environment, it makes sense to expand your customer base to a broader geographic base such as this one.

Selling your used equipment to international buyers is another good option. Canada, Australia, Asia and the Middle East all are excellent markets for U.S.-based companies to sell their late model and older model equipment. Parts of South and Central America and post-Soviet era countries also are fertile ground, as their buying power is strengthened as their currencies rise in relation to the U.S. dollar. Online auctions such as IronPlanet bring this global customer base together in one convenient Web-based location. About 35 percent of U.S.-based equipment sold through IronPlanet goes to international buyers.

Leading Economic Indicators
The U.S. market continues to improve at a steady pace. It’s going to be slow, possibly taking another three to five years to fully come out of the recession, but we’re on our way.

The coming year’s elections will inevitably contribute to economic uncertainty and cause companies to take a more conservative approach to business. The release of additional foreclosed homes by the Obama administration also has our interest.

Consumers, and from there businesses, will continue to cautiously wade back into buying as they pay down their debt and rebuild their savings.

The flow of new business is already improving, but pipelines are still lean so more conservative approaches to business and fleet management will continue to be critical.

Yes, the growth is moderate but its growth just the same. It’s also a more stable form of growth that makes us optimistic about maintaining the growth in the coming years.

By: Franklin Langham, Director of Financial Services Industry, IronPlanet

Franklin Langham is Director of Financial Services Industry for IronPlanet, a leading online marketplace for used heavy equipment. For more information, call 1-888-433-5426 or visit www.ironplanet.com.

Topics: Construction