Hot in 2002
www.iecvalue.com
INDEPENDENT EQUIPMENT COMPANY
2002 OUTLOOK FOR USED EQUIPMENT MARKETS
LOOKING INTO THE ABYSS
by Carl Chrappa, A.S.A., C.R.A.
Independent Equipment Company ("IEC"), the nation's oldest equipment
management firm, annually compiles and rates secondary market outlooks
for selected categories of equipment that are commonly financed by
leasing and asset-based lending companies. Overall, the outlook for
used equipment markets in 2002 is poor for the second year in a row. In
fact, this year's results are the worst in the Outlook's 13-year
history. As the following graph shows, for 2002, the 14 equipment types
surveyed had an average score of 3.93 -- (not satisfactory). By way of
contrast, the average score in 2001 was 4.86 (below satisfactory); in
2000, 5.07 (satisfactory); in 1999, 5.21; in 1998, 5.50; in 1997, 5.71;
in 1996, 5.86; and in 1995, 6.42. IEC views 1995 as a peak year for
equipment value cycles, with 1996 the start of a slow decline.
2002 is expected to be a year during which most used equipment markets
will continue to decline until consolidating at a bottom sometime near
the end of the year. Meanwhile, 2002 is forecast to be a year during
which the domestic GDP is expected to show a meager expansion. A
recently published consensus of 55 leading economists predicted that GDP
would expand by 2.5% for 2002. This is in sharp contrast to the latest
forecasts issued by the IMF, World Bank, and others, who predict the
U.S. GDP will expand by only 0.7% to 1.0% this year. IEC believes the
domestic economy was severely impacted by the events of Sept. 11, and
thus feels the economy will show a tepid increase for the year. The
forecasts are believed to be based on assumptions that the economy will
resume growth, led by a recovery in U.S. equity markets; a corresponding
increase in consumer confidence; an increase in consumer spending; a
continuation of relatively low fuel costs; "low" interest rates, etc.
Although the interest rate concerns were addressed by last year's 11
cuts in the discount rate, most economists believe the Fed will continue
to be extremely vigilant on the economy's health, and use whatever
monetary stimulus is left to assist the economy in its growth. However,
this recovery is not expected to be nearly as robust as past recoveries
during which GDPs improved by 5% to 7% on an annual rate. Rather, the
economy is expected to recover very slowly as manufacturers first
respond to increasing demand through the utilization of unused capacity,
which nationally exceeds 25%. It is widely believed that when the
capacity utilization rate rises above 80% (20% unused capacity),
industry will start purchasing additional equipment to increase
productivity and profits. However, it is also widely believed that any
recurrence of events similar to those which occurred on September 11
could dramatically undermine support for the economy. Thus, the very
possibility of such an occurrence is sure to keep business development
plans on a conservative path, as many companies struggle to survive in
the current economic conditions. Some economists have, in fact,
predicted that because consumer spending has not fallen greatly during
the slowdown, there exists a lack of 'pent-up demand,' which could cause
a recovery to slip into a "double dip" recession.
Based on the foregoing and on first hand knowledge of equipment secondary markets, IEC has compiled the following outlook for selected equipment types that are frequently financed by leasing and asset-based lending companies. For comparative purposes, a rating is given to each equipment type that is reflective of the expected secondary market conditions compared to historical conditions. These ratings range from 10 (outstanding) to 5 (satisfactory) to 1 (very poor).
2002 USED EQUIPMENT OUTLOOK
Automobiles (4) Zero percent financing during the fourth quarter of 2001 is thought to have "pulled ahead" approximately 400,000 to 500,000 unit sales from 2002 into 2001, thus, the outlook for 2002 is mixed, with final sales figures expected to range from 15.8 to 16.5 million units. There is also much concern about the large numbers of leased cars being returned; some 36-month luxury car leases carry 94% residuals; and many SUV leases are expected to expire this year, with 38-month leases carrying 69% residual values. This will surely translate into major losses. The used car market remains soft due to the success of the zero percent financing programs for new cars. Fallout in the automotive industry will carry a large "ripple effect" into other industries. This segment rated a 4 in 2001.
Container (5) New container deliveries plunged 39% from last year's total. The secondary market is in a state of oversupply, which has caused large increases in the numbers of stored containers throughout the United States and world. Fleet utilization rates have dropped significantly. Also, per diem rates have plunged 50% or more; used container prices are falling in most instances by over 20% for the year. The chassis market has also softened, due to the establishment of several large lease pools. This segment rated a 6 in 2001.
Marine (4) 2002 appears to be a mixed year -- charter rates are falling for most types of vessels. Cargo ship utilization rates have fallen into the 60's. Value indices for tankers are almost flat year-over-year, with bulk carrier values declining by over 25%. Likewise, charter rates have fallen significantly throughout the year. The market for tankers is more stable due to forced OPA retirements. The outlook for prices of most other vessels seems flat to declining. This segment rated a 6 in 2001.
Computers (5) The domestic PC industry experienced its first decline in shipments in its history last year. A slight increase in unit sales is expected for 2002. Extreme competition and price pressures have driven margins extremely low and negatively impacted secondary values. There is some activity in higher end server "mainframe" units, data storage equipment, and the market for LCD flat screens is robust. However, there is very little margin left in the secondary market. Many broker-dealers are expected to withdraw from the industry this year, or to expand into other product offerings, such as telephones, etc. Otherwise, the market segment can be characterized as "business as usual." This segment rated a 5 in 2001.
Semiconductor (3) 2001 was a very poor sales year for this sector with semiconductor sales plunging 32% for the year. Likewise, semiconductor equipment in the primary market suffered a steep decline in 2001, with sales declining by over 40%. Furthermore, capex estimates for 2002 show a significant decline, thus equipment sales in the primary market are expected to suffer for yet another year. For 2002, the secondary market remains in a significant oversupply position due to very low utilization rates at many of the world's semiconductor fabrication facilities. Some major fabs are reporting utilization rates as low as 25%. Thus, until utilization rates pick-up significantly, the used semiconductor equipment market is expected to be in an oversupply and very soft position. This segment rated a 4 in 2001.
Aircraft (3) The aircraft industry experienced a horrific year with all major airlines (with the exception of Southwest) reporting significant -- and in many instances historic losses. Even aircraft builders have drastically reduced their production schedules for 2002 and 2003. Many types of older aircraft now seem headed for the scrap heap. The number of aircraft available for sale has increased over three fold from the levels of twelve months ago. Most other sectors, including regional, business jet, and private aircraft have also been impacted. In addition, the cargo market suffered a significant downturn last year and is expected to recover very slowly in 2002. Thus, the short-term outlook for this market is grim. This segment rated a 5 in 2001.
Machine Tools (3) Sales of machine tools in the U.S. plunged by over 35% in 2001, and may fall by over 20% for 2002. Values of used machine tools plummeted throughout 2001 and are expected to fall further during 2002, although not as fast as the preceding year. Used machine tool dealers have discounted inventories in many instances from 20% to 80% in order to spur sales. The current U.S. utilization rate, which is below 75%, is having a major impact on the machine tool sector, which is not expected to recover until the utilization rate reaches about 80%. This segment rated a 5 in 2001.
Telecommunications (4) Sales of telecommunications equipment in the primary market fell by about 25% in 2001 and are expected to fall by more than 20% in 2002. Weak sales are a function of overcapacity, and the very poor financial conditions of many carriers, which caused a rash of bankruptcies last year and early this year. Foremost among these is the fourth largest bankruptcy in U.S. history -- Global Crossing. In addition, major carriers have announced cuts in capex spending in the area of 20% to 40% for 2002. Furthermore, leasing companies who have CLECs for customers should carefully follow the Tauzin-Dingell bill currently in Congress, which if not amended, could cause significant harm to the CLEC sector. Sales for most types of used telecommunications equipment, including central office switches, office systems, hubs, routers, multiplexers, etc., have softened significantly -- it’s just a matter of by how much. 2002 will be another difficult year for this market. This segment rated a 5 in 2001.
Construction (5) For 2001, construction equipment sales in the primary market fell by over 10%. Sales for 2002 are expected to remain about flat. Meanwhile, construction projects for 2002 are expected to decline by 0.8% to 1.8% (depending on the forecaster used), which would be the first decline in about a decade. Prices for most types of used construction equipment have fallen by at least 5% or more. Participants in this sector are urged to follow issues related to TEA21, which is scheduled for a reauthorization vote next year. If this bill is not reauthorized, it will have a negative impact on the primary and secondary markets. Low interest rates and continued government support are expected to hold up the market. This segment rated a 6 in 2001.
Mining (4) Mining had a mixed year for 2001. Although coal production was up, it was impacted by falling mine mouth prices. Most other minerals saw prices falling throughout the year, which negatively impacted mining activity, but not to the extent as seen in past downturns. Also, the industry has recently seen some consolidation which is expected to positively impact the profitability of the industry. Meanwhile, prices paid for used equipment softened throughout the year and are expected to remain soft into 2002. For underground equipment, condition remains extremely important in the used equipment market. Although this market has softened, it has not been dealt the punishing setbacks of many others. This segment rated a 5 in 2001.
Truck/Trailer (3) 2001 was another poor year as sales in the primary truck tractor market fell by over 35%. 2002 is expected to be yet another poor year for the industry, where primary market sales are expected to fall by over 10%. There have been numerous bankruptcies and failures in the industry. In addition, about 60% of operator's costs will face annual increases of over 10%, putting the industry in a very precarious position. Former Residual Value Guarantee programs have accounted for staggering losses by some manufacturers. Last year, new trailer sales also fell by about 30%; in line with the fall-off in truck sales. Used equipment values have plunged and the market is in an extreme over-supply position and is expected to remain so through 2003. This segment rated a 4 in 2001.
Rail (4) For the 2001, the rail industry showed a slight drop in total carloadings, with a moderate decline in intermodal units shipped. The number of new railcars built fell again in 2001 and is expected to decline in 2002 by about 40%. Meanwhile, lease rates remain very low. Many car types are in an oversupply position, and prices have fallen. Even the used locomotive market has been impacted by the recently-enacted Tier 0 regulations covering NOx emissions. This has led to increased surplus and scrapping of many formerly popular locomotive models. 2002 looks to be another soft year for the used rail equipment market. This segment rated a 4 in 2001.
Medical (5) The medical equipment market enjoyed a healthy year in 2001 and looks to repeat in 2002. Over 50% of medical facilities reported in a recent survey that their capital budgets will increase during 2002. The most popular types of equipment, in order, include X-ray, CT, Ultrasound, and MRI. PET Scanners have been very popular since they have been approved by CMS for reimbursement. In addition, combination PET-CT scanners are likewise rapidly increasing in popularity. Secondary market for equipment looks relatively stable, and in much better shape than most other industries. This segment rated a 4 in 2001.
Printing (3) The printing industry turned in yet another poor year due to continued declines in advertising, caused by the dot-com collapse and recession. Prices have significantly deteriorated for most types of printing equipment, with some demand remaining for certain types of 4- and 6-color sheet-fed presses. However, many other types remain very difficult to sell, with some dealers reporting that equipment sales are not a matter of price if there are no buyers to be found. A recovery in this area is expected to occur six months to one year after that of the general economy. Thus, 2002 is expected to be another difficult year for the industry. This segment rated a 5 in 2001.
CONCLUSIONS
As can be seen from the comments above, the overall outlook for used equipment markets in 2002 is poor. This means portfolio and equipment managers will face an extremely challenging year. Lessors with long-term leases currently in effect may escape the downturn, while those with leases maturing or in default situations will be thrown into the thick of things. Therefore, lessors are advised to carefully weigh all options available to them at lease termination; in the event equipment is returned, a solid remarketing plan is a must. Overall, the outlook for 2002 can best be characterized as "less worse." A complete, detailed report of IEC's "2002 Outlook for Used Equipment Markets" is available for purchase on line at www.AssetManagementCentral.com. Happy new year and best wishes to you all!
BIOGRAPHY
CARL C. CHRAPPA, A.S.A., C.R.A.
Carl C. Chrappa is President and CEO of Independent Equipment Company, the nation's oldest equipment management outsourcing firm, headquartered in Clearwater, Florida. He is a registered auctioneer and tested and accredited senior appraiser with over 30 years of equipment experience.
Mr. Chrappa regularly trades in equipment markets, and provides valuation and technical consulting services to companies throughout the world. He is also a member of the National Association of Business Economics, where he serves on the Association's International Roundtable.
He is a founding and current member of The Equipment Leasing
Association's Equipment Management Committee, he also serves on
the Board of Directors of the Commercial Finance Association, ELA
Business Services, Inc., and is a past technical director of the
American Association of Cost Engineers. He has
co-authored a book entitled A Leasing Company's Guide to Equipment
Management and is the author of several columns devoted to equipment
management. Mr. Chrappa is a graduate of the University of
Massachusetts at Amherst.
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Updated
November 05, 2005
