Can Brazil's rental boom continue? Murray Pollok reports.
By Murray Pollok10 November 2011
Brazil has the fastest growing rental market in the world. But is it growing too fast, and can the construction boom be sustained? Murray Pollok, IRN Editor, asked rental companies and suppliers in the country.
Brazil's rental market is super-hot, that much is clear from the statistics on equipment imports and rental company investment over the past 19 months. It was no coincidence that two Brazilian rental companies - Mills Rental and Solaris - appeared in the IRN-100 list of the world's top 100 equipment rental companies for the first time last year.
The question is, how is the rental sector coping with development at such a rapid pace and scale?
Right at the centre of the storm is Sérgio Kariya, director of the Mills rental division within Mills Estruturas e Serviços de Engenharia, which is Brazil's largest rental company. It is he who is responsible for spending around US$80 million on new equipment in the current year.
It is not surprising, perhaps, that he is optimistic about the market over the next five years. "First, we're going to have two big events - the World cup and the Olympics - that will force a lot of investment in infrastructure: stadiums, hotels, shopping malls, infrastructure roads, etc. This is going to absorb a lot of equipment", he tells IRN.
"Also, we have PAC, an accelerated programme to build low cost housing. The project is for eight million homes - and the plan is to build two or three million in the next three or four years."
A third element, he says, is big hydro electric projects, new refineries, and major investments in new shipyards. "We believe that Brazil's economy is going to grow at 4 to 5% next year . In addition, the World events need to happen. There is no going back; this is going to happen."
Claudio Zattar, managing director at one of Brazil's smaller established rental businesses, Brasif Rental, tells IRN that he shares Mr Kariya's market view; "We have a very, very positive scenario for the next five years. The new president of Brazil said that they will continue investing in infrastructure and is accelerating all the big projects. For example, the Belo Monte hydroelectric project in the north of Brazil - big equipment will be going in by April. It's just the beginning and it's just one of the projects. We have many more projects now being implemented."
On the Belo Monte project alone, Mr Zattar predicts that contractors will spend around $180 million on equipment, with around 25-30% of that directed towards spending on rental.
Equally optimistic is Durval Gasparetti, president of Brazil's very active rental association, ALEC (Associação Brasileira das Empresas Locadoras de Bens Móveis e Atividades Correlatas) and managing director of rental company Rental Servy.
Mr Gasparetti says 2010 was an exceptional year and that 2011 will see a resumption of smoother growth; "Based on the available data, we estimate that the civil construction growth in Brazil should be sustained at over 6% in 2011, and in the coming years it should maintain significant figures due to forecasted investments... in the area of popular housing, sanitation, electric energy and others, which are expected to invest US$933 billion, with $561 billion up to 2014. This, aggregated to other public and private investments, will guarantee the maintenance of growth."
From a manufacturers' perspective, Andre Freire, president of Terex Latin America, tells IRN that the company is bullish for the market as far ahead as 2016; "We have a window that goes to 2016, related to projects including the Olympics and the World Cup, but also hydroelectric plants and industrial projects, such as two large refineries."
It is these projections that lie behind the big investment plans of the major rental companies in the country, and the remarkable statistics on machine imports. Between 2009 and 2010 there was a 75% increase in equipment sales, according to Sobratema, Brazil's construction equipment association. Aerial platform sales increased from 900 units in 2009 to 3000 last year; crane sales doubled to 400 units; hydraulic excavators were up 90% to 5500 units and roller compactors up 69% to 2540 (see Table 1).
Despite this dramatic influx of new equipment, Sérgio Kariya at Mills says he is still seeing utilisation of 80-85% in his fleet. Durval Gasparetti at ALEC says oversupply of equipment has not yet become a problem; "Indeed, all kind of rental company have been investing in equipment, but I don't think that we had an oversupply, as the market has absorbed the [new machines], not only due to the increase in the number of projects, but also [because] of [demands for new kinds of equipment that bring productivity increases and technical innovation]." Mr Gasparetti even suggests that there may still be temporary shortages in some equipment types.
Mills' largest competitor is Solaris, the rental business owned by Argentinian construction equipment group Sullar Argentina. Paulo Esteves, sales director of Solaris, says Brazil represents "huge opportunity" for the rental business, in stark contrast to the sluggish growth in markets such as North America, western Europe and Japan. He says Solaris will increase its fleet size by around 40-50% this year.
However, he thinks general levels of demand will fall compared to last year and says rental rates have already been impacted by the influx of equipment, with prices at the end of 2010 around 20% lower on average than at the start of 2009.
"We are expecting very intensive competition and we are preparing for a price war", Mr Esteves tells IRN, "Rental prices are already down around 10% this year , and we expect a 5% fall in 2011. It will be a challenge for us."
These competitive pressures have been exacerbated by the many rental companies who have invested in the rental market since the boom started. Many of these are Brazilian - such as Caterpillar dealers PESA (Parana Equipamentos), Sotreq and Marcosa, as well as firms such as Rohr and Brasif Rental - but they also include international players such as Spain's GAM, Riwal of the Netherlands and Chilean company SKC Rental.
There has been particular growth in the aerial platform sector, the main rental product for both Solaris and Mills. Some crane rental companies such as Locar are entering the AWP market and other fast growing access renters include Efpaf and Trimak.
By some estimates, the AWP rental fleet in Brazil will have grown from around 7000-7500 units at the end of 2010 to nearer 10000 by the end of this year. Andre Freire at Terex says these machines are primarily owned by big rental companies and contractors; "There is still a lot of room to grow one level below that [to smaller companies]. That will happen when prices go down." He predicts 15-20% annual growth in the AWP fleet until 2016.
New entrants to the market can cause problems. Durval Gasparetti at ALEC estimates that the number of rental companies in Brazil has grown by around 20% in the last two years; "and many of such businessmen have no experience in this kind of business, which causes unbalance both in market competition, and also in the demand for manpower."
Mr Gasparetti says ALEC is open to these new players and wants to help them develop; "we offer training for technical and administrative skills to enable them to act in a professional and technically capable fashion".
Of course, not every rental company is using the boom to double their fleet sizes every year. Claudio Zattar at Brasif Rental, who sees the opportunity as clearly as his competitors, tells IRN that his company, which has a 2500 unit fleet of which 40% is industrial forklifts, says the fleet will have to expand by at least 10% each year to follow the growth.
However, the priority now is a restructuring of the rental business. "Of course we will put a focus on our profitable segments and we will decrease in areas where we are not making money." Mr Zattar singles out aerial platforms, telehandlers and power generation as the best performing segments, with the industrial forklift and construction equipment less so.
"Right now we are doing a lot of homework to be very prepared to grow profitably...Definitely we will grow, but we need to make sure that we are profitable". If we spend the right time to do the restructuring, we will be really strong to face the marked in the coming years."
Part of this restructuring will mean combining the sales and rental businesses run by Brasif, although maintaining a separation in the operations of the two activities. They are currently run as separate companies. One other development at Brasif Rental will be a move into crane rental. The company is starting with five rough terrain Terex models in early 2011.
Also taking a measured approach is Chilean rental company SKC Rental. SKC is already well established in Chile, with 13 depots there, but in recent years it has opened up in Peru (where it has five depots) and now in Brazil, with a depot opened in Paraná, in southern Brazil, in August 2010.
Pablo Lam, SKC's president, tells IRN that moving into Brazil has been extremely challenging, with Brazil's tax and visa requirements taking one year to sort out; "We went to Peru five years ago and it was our first international step. We had some difficulties and we thought that the second step [into Brazil] would be easier, but it was much more difficult."
So far the company has a small fleet of air compressors, generators, aerial platforms and lighting towers, although as yet there are no earthmoving machines. "It's a very attractive, huge market. Everybody is going there, but we are conservative and are not in a hurry." The start-up fleet of around 50 units will be increased to nearer 200 by the end of this year, says Mr Lam.
The plan is to operate only in southern Brazil as the start. Compared to Chile Brazil is like five countries, says Mr Lam; "So we have chosen just one to start."
He says there is lots of competition in the Paraná market, from Cat dealer PESA (which rents a wide range of equipment) to small ‘mom and pop' stores who are renting at low prices. "The market is still immature and there will be some years of transition."
Overall, SKC will expand its revenues by around 15-20% this year compared to the 30% increase in 2010. "That is one of the issues in Brazil", he says, "We will be more conservative than some; we will not follow the crazy growth. When you double the size of your fleet and you are already a big company, then that is a concern."
Both Mills and Solaris are well aware of the challenges of rapid growth, but there is customer demand and they are in a position to become dominant players in a very big market. Both are moving rapidly to exploit the opportunity.
At Mills, this year's $80 million investment will go predominantly on Genie and JLG aerial platforms and telehandlers (split 70/30 AWP/teles), with Genie taking the much larger share of the order. Mills has also ordered a number of Manitou handlers to trial.
The depot network will grow. The company had four depots in 2009, 14 by the end of 2010 and will open five more in the next year, including bolstering its network in São Paulo and Rio de Janeiro. AWPs and telehandlers will remain the focus, with a move into more general equipment rentals representing the next step, probably in two or three year's time.
The company says it wants to hep professionalise the industry, and one initiative in this regard is a new aerial platform operator training initiative. Mills is to establish four training centres and aims to sign up as an accredited IPAF training centre, the first in Brazil.
At Solaris, investment of $70 million this year will be split 60% on AWP/telehandlers and 40% on other equipment, including generators. It will add 600 AWPs and 300 telehandlers to the fleet in 2011. Like Mills Rental, Solaris will expand its depot network, from the current 11 sites to 15 by the end of this year.
Mr Esteves at Solaris highlights the challenges of such rapid growth. It isn't just about maintaining profitability, or retaining skilled staff, it's about establishing a rental industry from the ground up. For example, he says that one of the big challenges "is to develop a market for used machines. We've had a very intensive period of buying machines and we need to sell the used machines. We are working hard to develop a chain of small rental companies that can buy old machines."
That will certainly be one concern. More important, however, will be the ability of Brazil's rental sector to sensibly manage growth. As Durval Gasparetti at ALEC says; "Every rental company, from every corner of the country, had a good year in 2010, and we have excellent prospects for 2011 and for the coming years. But our market must take advantage of this excellent moment to build up and enjoy organised growth, otherwise a great opportunity will be lost."
Terex looks at AWP
production in Brazil
Terex Corp is looking at building Genie telehandlers and self-propelled aerial work platforms at its new Brazilian plant, possibly by 2012.
The facility, being built in the coastal town of Guaíba in southern Brazil, is primarily intended for Terex's roadbuilding equipment division, with machines expected to be in production by the end of this year. However, Andre Freire, president of Terex Latin America, told IRN that consideration is being given to produce articulated booms and telehandlers by 2012.
Mr Freire said the aim would be to get to 60% local content on machines. That percentage is crucial for machines to qualify as ‘made in Brazil' and attract subsidised government investment finance.
Another benefit of local production is that once local manufacturing of equipment has started, imported competitive machines then attract a much higher import tax. Mr Freire said import taxes for suppliers who are not manufacturing in Brazil jump from 2-3% to nearer 18%.
"For the first manufacturer to move, there is a financial advantage and competitors get more expensive the next day", said Mr Freire. "I've been pushing for a factory here for many years. Now there is enough volume."