European market remains highly diverse in terms of market developments

The growth of the European construction equipment sector seen in 2014 could not be sustained in 2015: Sales in Europe declined slightly by a moderate 2.5%. However, what looks like bad news needs to be interpreted carefully. The continued free fall in the Russian market was a decisive factor distorting the overall market statistics. In fact, sales in Europe excluding Russia saw growth of 3.5%. This illustrates well that the European market remains highly diverse in terms of market developments, a phenomenon which is apparent even in the large volume markets: We saw growth of almost 40% in Italy, but also declines of 25% in France. Over the year, the industry developed a pattern which was very similar to 2014. The first quarter almost kept up with the strong Q1 of 2014, but was followed by two very weak quarters, before Q4 brought back momentum with growth across all sub-sectors.

REVIEW OF COUNTRIES AND REGIONS

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Germany was once again the largest market in Europe. Equipment demand remains very stable, and well above the long-term average. In fact, there has never been a higher level of sales volume over a five year period than 2011 to 2015. This has been partly attributable to the post-crisis recovery, and may also have been helped by the “pull-forward” effect on machine sales of the tightening of emissions standards (buy early when cheaper lower-stage machines are still available). Overall, the market is viewed as having reached a certain level of maturity, and as a result, there is not much growth potential left for the medium term. On the other hand, there is also little risk of a severe downturn either. The construction sector remains on track, and the integration of refugees could further stimulate building construction (both residential and nonresidential). Therefore, the overall market outlook is stable.

The UK had been the shining star within the European construction equipment sector for more than two years. After the boom had set in from mid-2013, sales grew by more than 60% until the first half of 2015. This was fuelled by a strong recovery in the construction industry, and helped by relatively low equipment prices due to the strong Pound against the Euro, stimulating machine sales. In 2015, market saturation effects have become apparent. Growth rates have reversed, and in both Q3 and Q4 sales decreased compared to 2014. The outcome for 2015 was a marginal 1% increase in sales, and this could mark a peak for the foreseeable future. Similar to the German market, the overall outlook is for stability – market declines are not anticipated.

It had been anticipated towards the end of 2014 that France would be in trouble in 2015, and this actually materialized. Against the backdrop of a bad macroeconomic climate and an almost paralyzed construction sector, the year started as a disaster. After the first quarter, sales were down by 42% compared with the previous year. In particular, the rental sector – the key customer segment – did not show any substantial investment activity. The good news is that along with an improvement in industry sentiment, the sales situation has stabilised. The final outcome for 2015 saw construction equipment sales on the French market decline by 25%, but the momentum – Q4 marked the return to growth – suggests that the worst could be over now, and 2016 is expected to bring a recovery.

Italy, the fourth largest market in Europe, experienced a strong continuation of its recovery in 2015. With similar growth rates in each of the four quarters, construction equipment sales grew by 39%, which was most welcome in a troubled market. However, the current sales level is still well below the long term average, and there is still a lot of upside potential for growth. Recent political decisions to stimulate fleet renewal for ecologic considerations could help stimulate more growth. However, economic instability and financing difficulties are still present in the market.

The story of the Russian market has been told many times, yet the scale of market reductions are still alarming: From an already weak level, construction equipment sales dropped by a further 68% in 2015. It was a mix of political pressure, currency weakness, oil price reductions, and a domestic economic crisis which pushed the market down to a volume even lower than that of Poland. Russia now ranks no. 10 in Europe when it comes to market size, while only two years ago it had held second rank. It is cold comfort for European manufacturers that other markets are not able to compensate for loss of demand in Russia on a significant scale (including limited options for Asian manufacturers). It seems likely that the Russian market may have “hit the bottom” in 2015, but a quick recovery is unlikely, as long as political tensions remain.

2015 brought a continuation of the recovery in Central and Eastern European countries. Poland, fuelled by infrastructure investments, which are planned to be extended further in the coming years, saw good growth in equipment sales, as did the Czech Republic, Slovakia, Hungary, Romania, and the Baltic states. The recovery in Southern Europe speeded up in 2015; not only in Italy, as highlighted already, but also in Spain which was actually the European market with the highest growth rate (+68%), though from a very low absolute level. Only Portugal and Greece did not see any growth in equipment sales.

Further anchors of stability in 2015 were the Nordic countries, which saw a 6% sales increase. The weak oil price did not have a great influence on the Norwegian market yet, but there is still considerable risk for 2016. Benelux countries were also on a growth path (+8%), while Austria and Switzerland (-7%) saw slight declines but stayed at high levels.

EARTHMOVING EQUIPMENT

The 131,000 units of earthmoving equipment sold in Europe (including Russia and Turkey) in 2015, mark a modest decline of 3%. Again, the picture looks much more positive when excluding Russia – with sales showing a steady 4% growth. The pattern of sales through the year resembled 2014 to some extent: Q1 saw an encouraging start, with similar volumes to the same period in the previous year. Q2 and Q3 were weak periods with an extensive summer slump, and Q4 brought back growth to the sector.

Light equipment performed well in 2015. Sales of compact earthmoving machines in Europe were more or less stable at -1%. Growth was limited to mini excavators, which saw a sales increase of 8%. The other product categories saw moderate declines. Sales of compact wheel loaders decreased by 4%, mainly due to the difficulties experienced in the French market. Skid-steer loaders declined by 8%, and backhoe loaders even further, dropping by 13%. The weak performance of backhoe loaders is primarily attributable to the Russian market.

Against the backdrop of ongoing weakness in the mining and quarrying sectors, and troubles in the Russian market, sales of heavy equipment in Europe were down by 9% in 2015. The worst affected product lines were dozers (-30%), crawler excavators (-16%), and wheeled excavators (-13%). Sales of wheeled loaders (-8%), rigid dumpers (-7%), and ADTs (-5%) also declined. Only graders saw sales growth (+13%), fuelled by strong demand in Turkey.

ROAD EQUIPMENT

In contrast with a rather weak post-crisis recovery in the construction equipment sector in Europe, road machinery marks an exception to some extent. After 2014, the sub-sector was 24% below record levels of sales. While this is still significant, the situation is much better than what was experienced in the construction and earthmoving equipment segments.

2015 overall saw moderate declines in sales of 7.7%. The pattern of sales through the year was similar to earthmoving equipment: Single digit declines seen in the first quarter became stronger in the second and third quarters, while Q4 marked a return to growth. The fourth quarter recovery came from Western European markets, and most notably from France, as the French market stabilized towards the end of a bad year.

Interestingly, light and heavy compaction equipment declined at the same rate of almost 8%. Again, there is a strong regional component within this: Excluding the French market, there was some growth in the light equipment subsector, and without the impact of the poor Russian market, the heavy compaction product group would have been much less severely affected. When it comes to products, single-drum rollers and tandem rollers saw declines of 18% and 42%, respectively. Asphalt pavers sales were 17% down, again as a result of the weak Russian market. Vibratory plates declined by 2%, while sales of vibratory tampers deteriorated by 14%.

CONCRETE EQUIPMENT

Building construction equipment is the sub-sector within construction machinery that still shows no sign of recovery. This is not overly surprising, considering that this sub-sector was the most badly affected during the economic crisis post 2007. We should not forget that the downturn was ignited by a real estate crisis, and building construction in general has benefitted less from stimulus programmes in Europe than the civil engineering sector.

The improving performance of building construction equipment in 2015 (compared to earthmoving and road equipment) can therefore be interpreted as a “belated recovery” to some extent. However, the year did not deliver a substantial and wide- pread upturn. Due to very small sales volumes, volatility is often high in the building construction machinery sector, and his was true once again in 2015.

EXPORTS FROM EUROPE TO THE WORLD GREW SLIGHTLY

For concrete equipment, the year started badly, with a continuation of the weak performance seen in late 2014. However, after a very weak Q1 2015 with a 27% sales decline, the following quarters all saw growth, with an accelerating momentum. This culminated in an exceptional fourth quarter that saw 51% growth in sales, albeit, this is a comparison with a very low level of sales in Q4 2014. Overall, concrete equipment sales in Europe grew by 10% in 2015, which is again a reflection of “low volume, high percentage changes”. The concrete equipment sector is still a long way from peak levels, and also below the 20-year average.

When it comes to products, truck mixers performed best with substantial growth of 14% in Europe, while sales of concrete pumps were flat. Least positive was stationary equipment, with batching plants, recycling plants, and mixer systems all suffering sales declines.

TOWER CRANES

Lifting equipment, the other part of the building construction machinery sub sector, performed similarly to concrete equipment in 2015, with a recovery setting in later in the year. Momentum improved during the year, but the first three quarters still saw double-digit sales declines, before Q4 brought back growth to the industry.

Overall, sales declined slightly by 2% in Europe, but the contrasting geographical performances were even more striking than for other equipment sectors. The collapse of the Russian tower crane market was the only significant decline, but this was almost a 90% reduction in sales from an already weak level. Without Russia, sales in Europe would have been up 18%, backed by a very strong performance of markets like Turkey, Germany, the UK, and even France, all of which saw double-digit increases.

From an overall perspective, even if the Russian market was in much better shape, tower crane sales in Europe would still be well below levels seen in the past. Sales in Europe are well below the longterm average, and it is striking that the current market volume is still 80% below the peak levels of 2007, when Southern European sales alone were higher than total European sales today. In conclusion, any further recovery of the sector (which is feasible given the good prospects for the building construction sector) will probably be only a small step towards a return to historical levels of demand.

SUMMARY AND OUTLOOK

The story of disparities in the European construction equipment sector has been told many times. In the recent past, it was principally about the North-South gap. While this difference still remains, the most striking aspect at the moment is the desperate situation in the Russian market vs. a robust rest of Europe. In fact, Europe without Russia was amongst the top three performing regions in the world in 2015, behind only the Middle East and India. This contrasts with a clear loss of momentum in North America, where the market is almost back to the peak levels of 2006, but didn’t see any more growth in 2015. Latin America, Africa, and most parts of Asia (in particular China which saw the fourth consecutive year of decline) suffered further decreases. In an environment that lacked any clear drivers of growth, and against a backdrop of declining world equipment sales (-11%), Europe should be seen as a positive example.

It remains extremely difficult to forecast 2016, as there are still immense risks on the table. Most notable are a number of political tensions and conflicts, the unsolved Euro crisis (which has escaped public attention recently), the weakness of oil and gas prices as well as commodity prices in general. In addition, problems continue in emerging markets, and the net effect in economic terms of refugee migration, remains unclear. It is a positive sign that the overall business climate seems to be less influenced by risks and uncertainties recently. The CECE Barometer, the most relevant leading indicator for the construction equipment industry in Europe, grew significantly in the last quarter of 2015 and the first quarter of 2016. The index is clearly in a positive zone, which suggests a positive first half of the year when it comes to equipment sales.

STARTING 2016, THE CECE BUSINESS BAROMETER IS CLEARLY IN A POSITIVE ZONE

Looking at the European market in 2016, it seems most likely that the recovery in Southern Europe will continue (particularly in Italy and Spain). Fuelled by infrastructure investments, Central and Eastern Europe should continue its growth. France could win back a portion of what was lost in 2015. The high volume markets like Germany, the UK, Nordic countries, Benelux, and Austria and Switzerland are not expected to see further growth, but a slump isn’t expected either. Turkey has the potential to further accelerate growth, but political issues could limit investment activity. A quick pick up in the Russian market is unlikely, even if the political component of the crisis disappears. Overall, this translates into a modest single-digit growth rate as the most realistic scenario for sales in Europe.

What remains true, though, is that the European construction equipment sector is an exporting industry. Even in a difficult market in 2015 with declining worldwide sales, exports from Europe to the world grew slightly (by 4% in the first 10 months of the year, full year results were not available at the time of writing). The market will certainly not benefit from countries that rely on the mining and raw materials sectors (Africa, Latin America), and the low oil price will continue to take its toll in the Middle East, and most likely in North America as well. Further growth is anticipated for India, while a recovery of the Chinese market seems unlikely before 2017. Across all products and regions, flat world sales seems the most realistic forecast for 2016.