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Did we get the bottom out?

With a reducing demand of equipment during almost a decade, the year of 2016 was marked by frustrated expectations. But the good news is that the curve may eventually be inverted

Little by little it became clear that the Sobratema Study of the Brazilian Market of Construction Equipment 2016—consolidated in October and issued in November—would show a significant market reduction in 2016, compared to the previous year.

The reduction would certainly be significantly higher—approximately four percent—than that established in the study of 2015. In fact, sales of yellow line equipment dropped 36 percent in that year. After a reduction of 50 percent in 2015, the area reached a level similar to that of 2006 (the first study was presented in 2007 but carried out estimations about the market of 2006 which pointed to an approximate volume of 8070 units). In other words, the industry will go back one decade in 2016.

In the “Yellow Line”category, the steepest reductions occurred in families such as compactors—undoubtedly a consequence of almost none investment in roads—and off-road trucks, a category where the increasing rates are almost subjected to volatility due to the small volumes involved, but that also felt the reduction of investments in the mining industry.

The three surveys carried out along the year by the Group of Dealers (in March, July and October) were always looking to the areas with highest variations in demand. And the answers never changed: higher retraction in infrastructure, road works, paving, rental and mining; lower retraction in forestry and agriculture, in addition to—for some participants—small rental companies.

In the group of “other equipment” included in the Market Study, the consolidated drop in 2016 was even worse, reaching 63 percent. But it is important to remember that it is a very heterogeneous group with different drivers for each type of equipment.

The reduction in the volume of road trucks demanded by the construction industry was also strong (52 percent). It is important to remember that—in this group—Sobratema carries out an estimation of the quantity demanded by the industry based on the licensing of rear dump trucks, in the fleet composition of contractors and in the sales of concrete mixing trucks.

Likewise, the number of wheel tractors demanded by the area isalso an estimation related—in this case—to the variation in the demand of compactors. Summing up, the total reduction relative to the groups “yellow line” plus “other equipment” plus “road trucks” was of 45 percent in 2016.

It is important to point out thatthe Sobratema Study isalso following concrete equipment since 2015. But the volume of concrete mixing trucks that appears in this group was already included in “road trucks”. In other words, it may not be added.

The performance of the industry in 2016 came back to the levels of ten years ago, at least in the Yellow Line. And the highest drop that occurred in the other machines is mainly related to the estimation of road trucks demanded by the industry.

An exercise was carried out among the Dealers Group, comparing sales of these companies in the first halves of 2015 and 2016—distributed by the five regions of the country—to evaluate the regional impact of the crisis in the industry. In this sense, it is important to point out that—although this group is representative inside the Brazilian market—most companies sell individually their products in specific regions. In addition, not all participating companies have control systems which allow them todistribute their sales among the regions considered.

At first sight, we may say that the national distribution of sales was essentially the same in 2015 and 2016. But the proportional drop in the Northwest was strong; in a market already decreasing, its share in the national total was reduced in almost one third.

EXPECTATIONS

Turned this page, now it is time to think in the future. The expectation for 2017 is of a slight recovering, with an increase of 6.6 percent in the Yellow Line. Summing the remaining machines (expectation of increase in some categories are quite higher than in others) and the road trucks demanded by the industry, we have an expectation of 7.8 percent of increase for that year. Thus, sales of both groups would be respectively of 9225 and 15505 units.

It is important to remember that these forecasts are essentially the manufacturers’ point of view. Their clients, equipment buyers, were also optimistic, pero no mucho (but not so much).The expectation survey of contractors and rental companies carried out in 2016 and referred to the next year included three questions: Brazilian economy in general, construction industry and the companies themselves.

The results show arelatively more optimistic view of the performance of Brazilian economy in 2017 than that of the industry itself. But the picture has a very clear bias.There is also a considerable uncertainty about “when” things will start to be better. It seems clear that 2016 marked the bottom out, inclusive by the opinions of the companies recorded in the survey. It is also seen clearly the care with the timing and speed of an eventual retaking. “In spite of the optimistic view related to the economy in 2017, construction industry will not see tangible improvements before the second half of the year”, thought a large rental company in October, 2016. “The problem is that the length of the crisis is above the acceptable limit and the damages in contractors and supply chain companies are almost irreparable. Due to these factors, a large part of the market did not survive until this moment, and other part will not survive until the second half of 2017.”

At the same time, a survey carried out with the Dealers’ Group about the situation of the construction industry in 2017 showed a balance between pessimistic and optimistic opinions. But there was more optimism in relation to the performance potential of the companies.That being said, most companies asked in October, 2016 about a probable horizon for the recovering of construction equipment market chose the second half of 2017 or even 2018.

“The pessimistic expectation for 2017 is due to the still negative perspective in the political area (getting a little better after the impeachment but still too confuse) and in the economic area (where difficult measures have to be implemented with medium-term results)”, said in October a dealer which operates in several states of Southwest and Center-West. “It isalso important to remember a prediction of the former ministerMaílson da Nóbrega in the eventTendências no Mercado da Construçãofrom 2015which is apparently being confirmed: the recovering may start only in 2018.”

In turn, another dealer which operates more at the South of the country was warning that “the market still waits a move from the new Federal Government about transferring resources to public works, concessions and privatisations”. And this is counting till this moment.