When the Baltic States (Estonia, Latvia and Lithuania) joined the EU in 2004, they experienced an economic boom. The boom increased residential development, as citizens of these states invested in property, pushing up real estate prices and driving growth in the construction industry.
Much of the growth in the small counties is centred in and around the country’s capital cities of Tallinn, Riga and Vilnius, according to a 2008 real estate report by Sorainen, Ober Haus and Deloitte. It predicts that in all three cities combined, there will be a total of 364,000 sq m of new offices and 16,000 units of housing built in 2008, more than 221,000 sq m of industrial and warehouse buildings coming in 2008-9, and more than 377,000 sq m of retail space being built in the 2008-2011 period.
The rapid growth of the construction sector today reminds many in the region of the construction boom that took place in the 1980s, when the Soviet Union built tower blocks across the region. The USSR didn’t just drive construction, but also lead the development of construction equipment.
When the Baltic States won their independence in 1990, as the USSR imploded, this construction growth came to an abrupt end. With a new, independent, future in front of them, the new countries turned their attention to managing their economics, politics, education and other internal issues, to secure their continued existence and their competitiveness on the global level. It took almost twenty years for other countries, including Western Europe, to notice the Baltics. When they did, and these three countries were invited to join the EU, a new stage of development began.
The increased demand for real estate development was soon seized on by Lithuanian construction companies, and by construction cranes owners in particular. Demand for construction crane rental has grown considerably. At first sight, the crane industry in the Baltics appears like that of any other European country. However, all is not as it seems.
Alfonsas Luksevicius, general manager of Kauno Kranai, Inc, one of the largest Lithuanian crane companies, says, “First of all, one must pay attention to the fact that the peak of Russian cranes in these countries was in 1970 to 1979 (cranes made within that period amount to 11% of those in use today), and in the following decade the boom became extremely intense due to the Soviet-inspired residential investment.
“Today, in the three Baltic States, cranes made in the 1980s account for over 50% of all Soviet cranes present in the three countries. When the countries separated from the Soviet Union, they were not willing to buy Russian cranes anymore. Therefore, only 3% of cranes manufactured since the turn of the century, and used in the Baltics, are Russian.
“The number of Western-manufactured cranes started growing considerably in 1989, and the most rapid growth was observed in Estonia. The market share of western cranes in Estonia has now reached 15.4%. In Latvia, however, this figure is only 1.56%, and there are almost no western cranes in Lithuania, where their share accounts for only 0.5%, most of them being made in 1990 to 1999.
“The numbers show that the historical circumstances of the sector in the three Baltic States are similar, yet one key difference should be emphasised. Soviet cranes made in the 1980s account for 56% of cranes in use today in Lithuania, while Estonia has the least amount of such cranes, with only 40%. Estonia is dealing with the problem of replacement of old cranes most successfully.”
The high number of old Soviet cranes and an inability to replace them with new western cranes causes extensive problems for the construction industry in the Baltic states.
First of all, the capacity of the old Russian cranes reaches only 25t. This retards the pace of work and makes construction difficult, as rapid and productive work is key. The capacity of western cranes may be more than ten times higher. Russian cranes are not cost-effective, and have poor technical specifications. Drivers are increasingly unwilling to work with equipment that is so old. All of these factors should induce crane rental companies to replace them and renew their stock. There are serious obstacles to them renewing their fleets, however.
Old Russian cranes that don’t offer high capacity and a high specification considerably reduce rental prices in the region. Rental prices in the Baltic States are among the lowest in Europe, and they are particularly low in Lithuania, which has the largest number of old Soviet cranes and the smallest supply of new western ones. Rental prices are higher in Estonia, as the country offers more western cranes.
Luksevicius estimates that the hourly rental rate of a Soviet crane is EUR23, and the daily rate amounts to around EUR140: a monthly rental rate of approximately EUR2,800. However, the salary of the crane driver, crane operation costs (fuel, repairs), taxes and other government charges must all be deducted, leaving very little profit.
All of the region’s 625 crane companies could survive until recently, as there was so much construction work available. With so much demand, even low rental prices used to generate some profit. Today, however, the real estate bubble has collapsed: in Q1 2008 real estate prices dropped by 12.6%. Analysts say this was inevitable, as property prices in the Baltic States had grown beyond any logic.
This further encumbers rental fleets, and small companies in particular. Decreased demand for construction will result in more intense competition. The only way forward for crane rental companies is to offer new western construction cranes. A lot of new cranes, on hire from fleets in Finland, Germany and other European countries, are used in the construction sector these days, and make the market even harsher for small local fleets.
Prices of such new cranes, however, are relatively very high. Small Baltic companies, even if they have sold several Soviet cranes, may struggle to buy even a single new western crane. You will not go far with one crane. Only companies that have a large stock of old cranes can successfully go this way, as they will be able to acquire the number of new cranes sufficient to compete in the market. It looks likely that only a few dozen of the strongest companies will be able to offer cranes that meet modern demands and allow them to compete effectively. Even for the biggest companies, finding a market for their old cranes and raising capital for new investment is a challenge.
Fleet owners in the Baltics used to be able to sell many of their old cranes to customers in Kazakhstan, which, like the Baltics, was once part of the USSR. This was because, before the Baltic states joined the EU and the Schengen zone [which allows travel across most of mainland Europe, with a single visa] it was easier for Kazakhs to visit the Baltics than the rest of Europe. Now, however, as the Baltic States have joined the Schengen Agreement, prospective buyers from Kazakhstan are hardly coming here: If they get a Schengen visa, they go to other European countries instead, where more, and better, cranes are available.
Another potential market for these cranes is in Russia, Ukraine and Belarus. Old Russian cranes cannot be sold to these countries easily either, as they have very high customs duties on imported old vehicles and construction machinery. The third potential local market, Western Europe, lost interest in cranes of this quality a long time ago.
Where then should they sell their old Soviet cranes? Neither East, nor West will take them; Northern European countries have sufficient cranes and even lease them to the Baltic States. There is only one way left for the Baltic States: completely new markets in Africa, South America and the Near East. Some of those countries are still getting spare parts for Soviet and Russian machinery, so such machinery is still relevant and useful for them. Demand for old Soviet cranes in such countries could be considerably higher than in Europe.
