Business review of 2008 in the crane industry

Last year was one of the worst ever for the stock markets, and cyclical crane stocks suffered more than most in the carnage. Chris Sleight reports

No one needs telling that 2008 will go down in history as one of the worst ever years in the history of the stock markets. The cracks first started to appear in the summer of 2007, when the credit crunch first hit the headlines, but markets rallied following this to hit new highs - in the Dow's case, a record high - in October 2007.

Since then the trend has been downwards.

It would not be correct to say it has been downhill all the way. Last year started with losses, but there was a recovery in April and May which saw the mainstream indexes recover their losses for the year to date. Crane manufacturers did quite well in this period, with IC's share index rising to almost 20% above the start of the year position by mid-May.

But between mid-May and the end of October the slide was almost relentless. Over a 23-week period there were only four weeks in which the best performing indicators recorded a week-on-week rise. Markets fell for the rest of the time, plummeting particularly steeply following Lehman Brothers' Chapter 11 bankruptcy filing on 15 September.

Most of the last quarter of the year could be characterised as bumping along the bottom. The various government bailouts for banks and promises of spending packages were enough to stop the rot, but with confidence low and the economic outlook poor, any recovery looked a distant prospect.

2008 in figures

The net result was that the Dow finished the year down 32.78% at 8776, a slightly steeper fall than the FTSE 100, which lost 31.93% of its value over the course of 2008. More distant was the Nikkei 225, which fell 39.60% in the course of the year.

Unfortunately crane manufacturers' shares suffered even worst than these benchmarks, with IC's Share Index for the sector seeing a 60.06% drop over the course of the year. At 223.17 points, this was the lowest the index has been since mid-2005.

Crane manufacturers and other companies making high-value capital goods often see sharp swings in their share prices, and they are often termed ‘cyclical stocks' as a result. The thinking is that such companies experience exaggerated effects from the economic cycle - their shares rise sharply when economic activity rises due to a sudden demand for their products, but as soon as things turn down they are the first to see a fall-off in business.

Whether this is true for the particular niche of crane manufacture is a debatable point, because backlogs across the industry were a constant headache in the boom years, and were still growing in the first nine months of last year. No doubt there were some cancellations in the final quarter of 2008, and it will be interesting to see how big the order books look when full-year figures come out.

But backlogged or not, the crane sector was battered by last year's sell-off. Worst hit was Manitowoc, which saw its share price fall more than 80% over the course of the year. This was linked more to its foodservice division, which makes chillers and other equipment for commercial kitchens. It agreed to the US$ 2.7 billion acquisition of UK company Enodis in August, a move that the markets took a dim view of.

Terex was also a heavy faller last year, with a 72% drop being seen in its share price. Having grown primarily through acquisition over the last 15 years, the amount of debt Terex has is clearly a cause for concern in the markets, as is the value of those acquired assets in the current and future climate.

Elsewhere in the lifting sector, annual share price falls last year were more or less in line with the IC Share Index. It speaks volumes about the weakness of sentiment last year that the best performer - Konecranes - was a company that lost only 43.86 of its stock market value.

Currencies

It was not just the stock markets that suffered a tumultuous year in 2008. Currency exchange rates also went haywire as the economic outlook changed for different countries.

Having depreciated against most other major currencies for several years the Dollar rallied in 2008, to gain 4.67% against the value of the Euro and a massive 33.71% against the British Pound.

The sharp depreciation of the Pound was really the story of the year as far as currencies go. It was fairly stable until August, but the impact of the financial crisis on the country's ballooning deficit, its weak economic outlook and two big interest rate cuts towards the end of the year saw the Pound nose-dive. From being worth over US$ 2 in late 2007, it finished 2008 worth just US$ 1.48. Year-on-year the Dollar gained 33.71% against the Pound, while the Euro gained 27.73% against the British currency to almost a one-to-one exchange rate.

In contrast to the Pound, the Japanese Yen appreciated sharply in 2008, finishing the Year at US$ 1 = JPY 90.57, a 13-year high. The problem for Japan was that its interest rates were close to zero before the financial crisis even started back in 2007. When the crisis hit, other economies were able to cut their interest rates but, with no room to manoeuvre, the Bank of Japan could do little except watch the Yen appreciate.

2009 prospects

Share prices were more or less flat for the last 10 weeks of 2008 and, after coming close to oblivion in September and October, the crisis in the banking sector seemed to be over.

On the one hand, there should be the foundation for a recovery in share prices in 2009, however, the concern is that any improvement might be delayed by knock-on effects of the banking crisis to the real economy. Late 2008 was marked by a string of bankruptcies in vulnerable industries, for example, retailing, while in the US politicians, car makers and unions locked horns over the terms of any bailout of the ‘Big Three' - GM, Ford and Chrysler.

The annual results season a few weeks into the year will be key in setting the tone for 2009.

January IC Share Index - review of 2008

Stock Currency Price at start Price at end Change % Change

IC Share Index* 558.77 223.17 -335.60 -60.06

Dow Jones Industrial Average 13057 8776 -4280 -32.78

FTSE 100 6514 4434 -2080 -31.93

Nikkei 225 14691 8860 -5832 -39.70

Hitachi Construction Machinery YEN 3200 1071 -2130 -66.55

Konecranes € 22.55 12.66 -9.89 -43.86

Kobe Steel YEN 347 160 -187 -53.89

Manitowoc US$ 46.67 8.66 -38.01 -81.44

Palfinger € 25.61 11.24 -14.37 -56.11

Tadano YEN 1049 469 -580 -55.29

Terex US$ 61.89 17.32 -44.57 -72.01

*IC Share Index, end April 2002 (week 17) = 100

Exchange rates - value of US$

Currency Value at start Value at end Change % Change

YEN 109.58 90.57 -19.01 -17.35

€ 0.6786 0.7103 0.0317 4.67

UK£ 0.5068 0.6776 0.1708 33.71

Period: Week 1 - 52, 2008