Debt drama derails growth

20 September 2011


The year started well in the US, with manufacturers and users reporting the first signs of growth. After a summer of squabbling in Washington and instability on Wall Street, a lot of that optimism is receding. Nicole Robinson reports

North America had high hopes for 2011. Companies had seen an uptick toward the end of 2010, which they rode into the beginning of the year as business continued to grow. In March, massive equipment trade show Conexpo in Las Vegas was filled with optimism.

Few people dared to say it aloud, but many were thinking, “we’re past it.” It being the recession, the credit crisis and other economic woes that have plagued the crane and other markets over the last few years.

As 2011 progressed into the summer, the optimism of Conexpo faded and the political gridlock of Washington and its debt policy became all too real. On its heels was S&P’s downgrade of the US credit rating, dramatic drops on the stock market and economic instability in Europe.

Charles Snyder, president and CEO of rental firm AmQuip, based out of Pennsylvania, has observed “significant pull back” in business this summer compared to earlier in the year.

“There seems to be a direct correlation with the debates in Washington about the debt ceiling,” he says. “And the more those debates continued and the louder the politicians got, the more nervous our customers got and consequently a lot of the projects that were slated to start in the June/July time frame, they decided to hold off.”

Many of those, he notes, were discretionary-type projects where customers had funding in place with which to move forward. “We’ve seen a summer slow-down to the tune of about 8-10% from our projections and that continues as we work our way towards the fall.”

Energy excels
One sector that has overwhelmingly provided demand for cranes is energy, including oil, gas and power utility work. Every company Cranes Today contacted for this article reported strong demand from these industries.

Since 2001, total net U.S. refinery capacity has grown by more than 1 million barrels per day. January 2011 saw the highest refining capacity in the US since 1982, the US Energy Information Administration (EIA) announced this summer. Atmospheric crude oil distillation—a process of separating crude oil components—at US refineries was 17.7 million barrels per day at the beginning of 2011, which is 0.15 million barrels per day above its level at the start of 2010.

Nearly half of US refinery distillation capacity is located in the Gulf Coast region. The EIA says most expansions of refinery distillation capacity have taken place at the larger refineries, most of which are located in the Gulf region.

That news wouldn’t surprise crane companies located in the Gulf states, particularly those in Texas and Louisiana. Keith Ayers is the CEO-director of sales for Houston, Texas, based CraneWorks, Inc., which builds cranes for the oil and gas industry. Manufacturing specialty-built, truck-mounted crane units for these types of applications has been very successful. “We’re probably one of the busiest crane dealers right now,” Ayers says. “We’ve got a backlog of more than 300 cranes sold at present.”

On a national scale, Larry Weyers, executive vice president of Americas for Manitowoc, says the oil and energy industries were the main driver when the Wisconsin-based crane manufacturer saw a pick up in activity.

“Specifically for the products we manufacture out of our Shady Grove [Pennsylvania] facility, 2011 has been very strong,” he says. “Rough terrain cranes, truck cranes, boom trucks, industrial cranes, all of those product lines we’ve experienced some good activity, specifically when you compare them to last year.”

He credits much of the success to how Manitowoc and its dealers managed inventories during the downturn, particularly throughout 2010, explaining that part of this year’s production demand is owing to the need to replenish dealer inventory. He notes that it’s not really due to any project growth in North America. However, there are cranes being shipped to dealers that are going into retail applications.

“Oil and energy has been a strong sector,” Weyers says. “Our boom truck business is up more than double digits over last year. And gas is a part of it, especially with our bigger truck cranes 80t, 90t, 100t— with the new 150t RT that’s coming out— the demand for that has been very strong.”

Supplying to the oil and gas industry is very much dependent on the price of oil. Weyers is sure to add that in addition to the turmoil in Washington, customers are watching to see whether a barrel of oil drops in price. He estimates if customers see prices staying close to USD75 to USD80 a barrel, their business is going to be good.

For other energy sources, business is promising as well. The EIA expects the total natural gas consumption will grow by 1.8% in 2011, most of this increase will likely be made up by industrial and electric power consumption. The agency also notes that July’s extremely hot weather seen throughout most of the United States, contributed to an increase in consumption for electric power generation. And projected consumption for 2012 shows further increases.

Kobelco, manufacturer of crawler cranes reports demand for smaller machines, particularly between 85t and 100t capacities for natural gas drilling. “The major driver is fracking for natural gas, moving drill rigs,” explains Jack Fendrick president and COO of Kobelco. “When our government shut down the Gulf, the oil companies didn’t stop working. They just started using some of their resources and leases on shore. They started getting very active in the natural gas business.”

Production of natural gas in 2011 is expected to see a 5.9% increase over 2010, with growth “centered in the onshore production in the lower 48 states, which more than offsets projected declines in the Gulf of Mexico,” the EIA says.

In these energy sectors cranes are required for maintenance among other applications, but end users are not building new plants, whether that’s a refinery, chemical plant or coal plant. This leaves the market for larger crawler cranes very slow. The energy, oil and gas exploration and power distribution industries require cranes with high capacity, mobility and high reach aerial applications, explains Scott Rolston, senior vice president, sales and marketing, with Manitex International. “The last two years the market has been superb, trending up over 100%,” he says, mainly because of these end users.

Manitex cranes are being used in power line construction both to erect tower cranes for lifting, as well as for aerial applications for work in excess of 205ft, Rolston explains.

The lack of capacity for electricity distribution, as well as high oil prices, has driven some of Manitex’s stronger dealers to begin to replenish their fleets. “Although in most cases it’s still at a relatively conservative level,” he reports. “Maintenance fleet rental companies, which in many cases operate the equipment for their own use, are finally beginning to selectively replace equipment that has been allowed to age beyond the normal replacement cycle. Large rental companies, which model their business on bare rental, they are also beginning to refleet.”

He explains further, “I believe there are two factors. One, up to now an optimism that the market or economy is turning and, two, a maintenance cost on their ageing fleet is simply driving them to replace that fleet with new equipment. Any business model works best if you know what your costs are. You can adjust other expenses if you know what your equipment costs.”

Time to buy?
Rental companies have been testing the water, so to speak, when it comes to replenishing their fleets after the last few difficult years. “My observation is that customer confidence is very guarded, and becoming more so given recent finances,” says Rolston. “Customers are certainly taking advantage of retail opportunities but I believe very few of them are leveraging those as they did in the middle part of last decade.”

In most situations, manufacturers reported fleet replenishment for equipment that has depreciated. Manitowoc has seen a small level of this activity, primarily in the smaller boom truck business.

“We have seen that activity more in the industrial rental fleets—more of the utility, or smaller equipment—primarily because a lot of these companies have held off replacing this equipment for three or four years,” Weyer says. “But as far as the big crane rental companies, we haven’t seen that yet.”

However, he explains, some of Manitowoc’s dealers have their own rental fleet, and it expects they will build those up a little more with cranes that will be shipped between now and the end of year.

“Primarily because, with the market where it’s at, we may see some contractors go with rental or a rental-purchase option first before they look at buying a crane because of the uncertainty in the market,” he says.

“The major fleet owners are looking at the rental rate, and while the utilization we’re seeing with bigger cranes is between 72 to 85 % the rates still have not come up yet to where that trigger point is for them to look at their return on investments.”

Both rental rates and utilization has dropped, and while the market has seen utilization increase, the rates haven’t caught up, he explains. Until then major fleet owners won’t replace depreciated equipment.

AmQuip’s Synder says it is a good time to replenish stock, with a caveat. “We’re coming off of low levels of utilization. And we’re looking out into the future with the lack of confidence and clarity by our customers. On one hand, we are [confident] and have placed orders for new cranes for our fleet pipeline. On the other hand, we have been a little bit timid about placing significant commitments because of the lack of confidence and clarity of our customers.”

The Northeast-based rental company plans to place additional fleet orders in the next 30 days, mostly to replace aging equipment, but with a few strategic purchases. It recently bought a second 130t RT and plans to invest in more larger RTs in the next round of purchasing, as well as a few larger ATs. However AmQuip remains cautious about spending.

“It’s not because we don’t have capacity to place larger orders, because we do,” Synder says. “We are just as nervous as our customers about future prospects, and the seeming economic instability around the world, to get too far out in front of what could be another recession or a double dip. We don’t want to be too bold about getting too much fleet in the pipeline.”

TNT Rigging, Inc., based out of Houston, Texas, with branches in Louisiana, does a lot of work with the oil and gas industries. President and CEO Mike Appling says 2011 has been an improvement over last year and that utilization has vastly improved. TNT is fairly diversified and has everything from boom trucks up to 800t machines. The demand for any size machine can ebb and flow at any point in time, says Appling. “The turnarounds I get for machines 200t plus, and 75t to 120t machines in the oil field or for commercial projects can be all over the board.”

For the remainder of the year, TNT plans to only buy as it sells a piece of equipment, having made larger investments with two acquisitions earlier this year.

“I wouldn’t say anybody is confident right now, especially this last month,” Appling says. “You can see that by looking at the stock market. Things are dropping precipitously.”

In Florida, Sims Crane and Rental Company, which works in the southeast United States, has stayed busy with commercial and government contracts. There isn’t any significance to 2011 and replenishment from its perspective. “We always try to rotate stuff in and out, and we’re always trying to get rid of older stuff,” says Dean Sims II, vice president of marketing. “That’s an on-going battle whether it’s good times or bad.”

Emerging business
This summer Sims crane has been doing a lot of work at various stadiums around the state of Florida. Projects include Orlando’s Amway Arena where home to the NBA’s Orlando Magic, among other teams; The University of South Florida’s Sun Dome in Tampa; filming towers at the University of Florida Gators Football’s practice field; and for renovations at the St. Pete Times Forum, home to the NHL’s Tampa Bay Lightning.

All of this stadium work happening at one time is odd, Sims admits. “With the way the economy is, you hear about people not having money to go out and spend on entertainment. These ball clubs are spending money hand over foot. I guess they’re just trying to draw bigger crowds.”

Demand in Florida is a mix of opportunities. Sims Crane has seen projects for civil and government buildings, hospitals, among other industries. Sims says there is bridge and roadwork because that’s the nature of Florida’s highway infrastructure due to its swamp and wetland geography. And commercials opportunities are there, he says, you just have to look a little harder to find them.

Further to the north, Synder speaks of similar opportunities that AmQuip has seen reemerge, particularly from academia and healthcare: “A lot of the projects that major universities had planned, designed and funded back before the downturn in 2008, were put on the shelf when things started turning down,” he says. “We’re beginning to see those go forward. And the good news about those projects going forward is that they can hit the field and break ground pretty quickly because most of the front-end design and permitting has already been completed. We’re also seeing strength in the health care sector with a lot of hospital work and a lot of medical facility work, which is also a bright spot.”

Weaker areas continue to be residentialand commercial-related, and there is not a lot of high-rise work. But AmQuip is seeing a trend in its large tower crane division, for demand has been almost non-existent the last three years. “It’s very early,” warns Snyder. “We are now for the first time in three years beginning to see just a little bit of pick-up in tower crane bidding activity, which leads to what we believe will be little bit stronger tower crane demand going into 2012.”


Truck mounted cranes specially built for the oil and gas industries Truck mounted cranes specially built for the oil and gas industries
Kobelco is seeing demand for smaller machines for natural gas projects Kobelco is seeing demand for smaller machines for natural gas projects
Sims Crane brought in the 350t Sims Crane brought in the 350t "Dawn Ann" crane to the Ice Palace, the home of the Tampa Bay Lightning Hockey Team, as they make renovations to the venue
An AC500-2 on a windmill erection jobsite in Maple Ridge that belongs to JPWRigging sold by Empire Crane An AC500-2 on a windmill erection jobsite in Maple Ridge that belongs to JPWRigging sold by Empire Crane