North America's rental sector is recovering, but can it be sustained?

By Murray Pollok11 November 2011

United Contractors, Inc. from Johnston, Iowa, uses its 100 t Link-Belt 218 HSL crane to set bridge g

United Contractors, Inc. from Johnston, Iowa, uses its 100 t Link-Belt 218 HSL crane to set bridge girders on US Highway 169 over Lizard Creek northwest of Fort Dodge, Iowa.

The North American rental sector is making a welcome return to growth this year, with an expected 5-10% increase in revenues. However, as Murray Pollok reports, the recovery remains far from robust.

There was no shortage of positive noises coming out of this year's Rental Show in Las Vegas. With visitor levels clearly up from the fairly depressing showings in 2009 and 2010, and the market now two years removed from the depths of the financial crisis, it is clear that there are genuine reasons for optimism.

For one thing, it is for the first time for years that the big US rental companies are making significant investments again - on the show floor, for example, there was much talk of a 2000 unit order for aerial platforms from Hertz.

"Pretty much all of our major customers have placed orders for this year, which is the first time that has happened for several years", says Dave Stewart, vice president of sales and marketing at Canadian aerial platform manufacturer Skyjack. He says the company has doubled its production rates over the previous three months.

His aerial platform industry competitor, Tim Ford, president of Terex AWP, echoed his comments; "For the last two years we've come to the show and it has been a downer. The message for this year is that the industry is making a turn - you can feel it in the energy levels of the visitors".

The investment is being forced on rental companies because their fleets are getting older - the vast majority of the planned spending is to refresh rather than enlarge the fleets - and because utilisation rates are starting to creep up again.

In their recent quarterly results, Sunbelt Rentals, RSC and H&E Equipment - to name just three - all reported double digit revenue growth in the final quarter of the year (measured against a very bad quarter in 2009), and all are seeing improved utilisation; in the case of H&E, 73% physical utilisation at the end of 2010 compared to 53% a year previously.

RSC in particular is benefiting from its heavy presence in the industrial rental sector, a shift in focus that other rental companies like Hertz and United Rentals are following. Erik Olsson, RSC's president and chief executive officer, sees "continued strengthening in the industrial markets and signs that the non-residential markets are bottoming and beginning to turn".

These kinds of figures are what have promoted ARA's predictions for a recovery in rental revenues in 2011. Speaking at the opening of the Rental Show, the ARA's chief executive officer, Christine Wehrman, "We're probably looking at a 7-8% increase in our rental volume in 2011...We're real pleased that we're able to say it will be a better year."

If that makes everything sound fine, then it's probably a good idea to remain cautious. While everyone is keen to welcome a more positive outlook, there is no guarantee that the recovery will robust and not much evidence yet that rental pricing - the key variable in the rental equation - is significantly improving.

The signs on pricing are mixed and point to a stabilisation rather than a dramatic recovery. Sunbelt measures pricing in terms of yield - a measure of changes in revenue related to pricing and items such as delivery charges - and reported a 5% increase in the final quarter of the year, the third quarter of growth in a row.

Both RSC and H&E reported sequential improvements in prices, but in both cases rental prices remain lower than they were a year ago.

And the central fact remains that the US construction market is still in a pretty poor state. The US construction market shrank by 6.4% in December, year-on-year, and 2010 as a whole saw a 10.3% decline.

Ken Simonson, chief economist of Associated General Contractors of America (AGC), described the figures as "dismal" and said they showed that "the agony of the recession continues for millions for millions of construction workers and their firms."

His outlook for 2011 is very mixed; "Spending on rental housing, warehouses, hospitals and factories should pick up. Power construction should stay strong, and federal dollars for stimulus and base realignment projects will continue to sustain some contractors. But public school construction and other state and local projects will keep shrinking, while single-family homebuilding, retail and office construction are likely to remain feeble."

The big rental companies are not kidding themselves that they are out of the difficult times completely. The CEO of one of the big US rental companies told IRN during the Rental Show that expenditure remained firmly on fleet replacement rather than expansion, and that it was still risky for companies to invest on the expectation of significant increases in demand.

It is also true that smaller rental companies are being more cautious on spending than the nationals. Terex AWP president Tim Ford acknowledged that smaller and mid-sized renters have still to follow the lead of the nationals, apart from anything else because they are finding it more difficult to get finance.

Those rental companies who are looking to invest again also have other issues to content with. Equipment manufacturers are now facing problems meeting the demand from the bigger US rental companies, with problems in the supply chain and also rising raw material prices - steel alone is up around 25% since November.

Several manufacturers at the Rental Show were prepared to say that prices on equipment were likely to rise if raw material prices do not come down.

Richard Tindale, vice president of sales and marketing in Europe, Africa and the Middle East for Snorkel, told IRN, "The features of the year are going to be increasing prices and longer lead times." Not all the noises are positive, then.

US equipment
sales to grow

Members of the US-based Association of Equipment Manufacturers (AEM) are predicting a 12.7% increase in construction equipment sales in the US in 2011 followed by a 14.8% increase in 2012.

AEM's latest ‘business outlook' survey - issued at the end of 2010 - predicts that the recovery in the US construction equipment market will continue into 2013 with 13.0% growth. The survey forecasts Canadian growth of 12.0% in 2011, 14.8% in 2012 and 12.7% in 2013.

"While this rebound is welcome, you have to remember our industry was down 30 to 50% in the recession, so there is a long way to go", said AEM president Dennis Slater, "Although business is improving, it will take years to recover the sales losses of 2008-2009."

For sales in the US, AEM members predict that the best performing sector will be road building equipment (pavers, rollers, asphalt plants, etc), with annual growth of between 25.0% and 28.3% for the next three years. Next best is earthmoving equipment, with annual increases of between 14.1% and 18.6% from 2011 to 2013.

The slowest growing product sectors over the 2011-2013 period are forecast to be concrete equipment (growth of between 7.4% and 11.1%), light equipment (9.4-11.5%) and cranes and lifting equipment (10.2% to 12.1%).

AEM is the North American-based international trade group representing the off-road equipment manufacturing industry.

United Contractors, Inc. from Johnston, Iowa, uses its 100 t Link-Belt 218 HSL crane to set bridge girders on US Highway 169 over Lizard Creek northwest of Fort Dodge, Iowa. The girders weigh 13.5 t and are 25.5 m long.

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