The Brazilian market for construction equipment

By Brian Nicholson and Rubens Sawaya

Sales should grow by 11.8% in 2013, which means a total of 76,000 units sold; In 2010, the best year for the Brazilian industry in terms of growth, were sold 70,000 items of equipments

The world market for construction equipment has been going through ups and downs.  It grew strongly until the crisis of 2007/2008, plummeted for two years, climbed again until 2011 then suffered another setback in 2012. But the drop in 2012 primarily reflects the fact that many markets grew more than expected in 2011, with 2012 seeing an expected return to a more moderate recovery.

China, the world’s largest equipment market, saw a decline of around 22% in 2012. The latest forecasts are for a more moderate growth there, thus reducing China’s forecasted participation in the world market in the middle of this decade to slightly below 40%.

Looking basically at sales of earthmoving equipment, plus some handling and paving equipment, the world market in 2012 was estimated at 925,000 units with an aggregate value of US$100 billion. Brazil currently makes up around 3% of this total.

ROLLER COASTER

To get the main results of the Sobratema Study of the Brazilian Construction Equipment Market for 2012, with forecasts for 2013, we first revised the market estimate in 2011 to reflect the final data. This indicated an upward adjustment of 3.2%.

Demand was then calculated for each category of equipment in 2012, using as always confidential estimates from manufacturers and importers, and other sources. Growth rates for 2012 pointed to an overall 2.9% decline in sales of earthmoving equipment. Projected growth rates for 2013 take into account the expectations of market players, members of the Sobratema Support Group and its consultants.

In September the study surveyed 29 companies that buy equipment. These were mainly construction companies, but also some rental companies. The group was slightly larger than the group surveyed in 2011 but included many of the same companies. It is thus possible to make rough comparisons between the two years.

2012 was rated worse or much worse than expected by half of the companies surveyed. The main problems were essentially the same as the year before – delays in projects, and a shortage of skilled labor. Projects were delayed for broadly the same reasons as the year before – environmental licensing problems, slow tender processes and late payments on public projects. The only significant difference was an increase in the number of companies complaining about late payment.

ECONOMY

Many people imagined that President Dilma Rousseff – now in her second year in office – would continue her work by focusing on the much-needed investments in Brazil’s precarious infrastructure. To the general surprise, this has not happened. There are still doubts about whether next year Rousseff will resume the role that helped her to win the presidency.

If the construction sector is lucky, perhaps the president is applying the old tactic of boosting government infrastructure investments in election years. There will be elections again in 2014.

In early 2011, we detected signs that the new government would follow a restrictive economic policy in terms of public spending, slowing down the PAC. Faced with a perceived threat of economic over-stimulation and the consequent impact on inflation, the financial markets argued strongly for higher interest rates and measures to ensure a fiscal surplus. This fear proved unfounded, given the downturn of the crisis-plagued world economy. Europe was worst hit, but the Brazilian economy was also impacted.

The restrictive policies of early 2011 accentuated the slowdown in the Brazilian economy. There was some room to start lowering interest rates, but this produced virtually no reaction from the economy. In fact, 2011 was not such a bad year for the heavy construction equipment sector, following the strong growth in 2010. As frequently occurs in the construction sector, growth remained inertial, but slowing down.

The sector started 2012 still optimistic that restrictive domestic policies would be reviewed, considering the worsening international crisis. There was a certain consensus that the government had exaggerated the severity of restrictive policies in 2011 and it was thought that projects contained in the PAC would be resumed, with a return of private investment, and that 2012 would see GDP growth of at least 4%.

It was only in mid-2012 that the government moved to stimulate the economy with measures that included tax incentives, a sharper reduction in interest rates and currency devaluation. While extremely important, these measures taken to stimulate the economy were excessively timid. Brazil would grow around 1.5% in 2012, a rate much lower than expected. There were some signs of renewed growth in the second half of 2012, if trends held firm.

INVESTMENTS

For this to happen, the government would have to take much stronger action than it has so far, primarily with the faster resumption of the most urgent infrastructure works included in PAC II. Hopefully this can lead to an economic recovery, with infrastructure investments generating positive effects on the construction equipment sector.

The “PAC concessions” is a positive step, because it aims to involve the private sector in infrastructure investment. The problem of the “PAC concessions” lies in the length of time required to structure the concession operations and in the type of work involved. The impact will only be felt from the end of 2013 onwards.

The reduced availability of public resources can be attributed to a drop in revenue, caused by lower growth. Renewed economic growth resulting from a policy of more direct infrastructure investment would impact tax revenues positively. The level of public debt as a proportion of GDP would not only be kept under control but would fall, as seen during the recent years of economic growth. Tax exemptions have helped by preventing a major economic slowdown, but they have little efficiency as instruments to create renewed growth, which occurs only with the resumption of private investment. Exemptions have a positive impact when businesses are willing to make new investments, which they will do only when there is a prospect of growth in the medium term.

The currency devaluation was also very positive, although it was too timid. In fact, there is a real risk of inflationary pressure if we consider the way that the domestic productive sector is integrated with foreign suppliers. Devaluation will have a very positive effect in the medium to long term, encouraging substitution of imports by local production. This will raise domestic income, which is of paramount importance for economic growth and above all for a renewed growth in civil construction.

NATURAL PATH

The difficulty will be in the coming debate with economists who favor raising interest rates to ward off an inflationary risk. They adopt an accounting-style vision of the costs of raising wages and allege that the economy cannot grow. This vision ignores the fact that the natural path of economic development is via higher wages with companies earning more from the mutual increase of their sales, rather than by raising prices. The whole economy stands to gain. In times of global crisis, it is essential to take advantage of the size of the Brazilian market. It is just necessary to control the exchange rate not to let this momentum be diverted into imports.

The world economy will continue its downward trend. Latin America, a major buyer of machinery and equipment from Brazilian manufacturers, has seen various national economies slow down. In the case of commodity exporters this is a direct impact of lower global growth. The fall in commodity prices – more so than in quantity – has generated problems in the countries’ external accounts that have also suffered the impact of the slowdown in Brazil. This is principally true for Argentina, since Brazil is its main market, and particularly so for manufactured products. Argentina’s resumption of growth now depends much more on how Brazil reacts. If the Brazilian economy grows, Brazil will also sell more equipment to Latin America, because our neighbors will benefit from our growth.

The table above (which includes more types of construction equipment than those covered in the Sobratema Study) shows that Brazilian exports of equipment to Latin America have been losing ground to equipment from other sources since the mid-2000s. Even Argentina, Brazil’s largest trading partner in Latin America, found it difficult to continue importing from Brazil in 2012.

MARKET TRENDS

It is important to stress Brazil’s loss of market share in Latin America, both in terms of participation in projects and in the sales of equipment that follow them. China is conducting an aggressive policy of increasing its market share, mainly by leveraging its status as the biggest buyer of raw materials in the target countries to negotiate trade agreements.

On the other hand, the global crisis has meant that countries like Mexico, the U.S. and Europe have raised their presence in Latin American equipment markets due to the downturn in their own markets.

In terms of market growth trends, an important factor is the heavy reliance of countries on their exports to China, as well as the growth of the Brazilian economy. The growth trend in Brazil will depend on Brazilian policies to leverage the domestic market and make it grow faster.

Likewise, equipment sales to Latin American countries clearly depend on an international strategy. Other countries have gradually occupied Brazil’s position. Policies of currency devaluation and export promotion can help. Once again, the problems of Brazil’s internal infrastructure need to be addressed.

PROJECTIONS

We estimate that sales should grow by 11.8% in 2013, which means a total of 76,000 units sold. This is consistent with projections made by various manufacturers. It should be remembered that in 2010, the best year for the industry in terms of growth, 70,000 items of equipment were sold.

Going forward to 2014, an election year, we project an average annual growth of 8% until 2017. Despite the change in composition between segments, the main focus of demand will remain in infrastructure that will grow above the average. Despite the infrastructure growth seen during the last decade, very little was done. The country now has the opportunity to address these bottlenecks.