Compact Machinery Market Trends

Compact machines have been experiencing a major resurgence in Australia over the last 12 months. The demand for used skid steers and diggers under 5 tonnes have lifted sales of these assets to close-to-record highs.

At Pickles Industrial, we found this interesting trend required further investigation. We wanted to find out what was driving this demand, and how the current market was reacting to the lack of supply.

Supply chain issues  
A common theme within many Australian industries is supply chain issues. These problems, in part, are a result of the COVID-19 pandemic, which has slowed, and in some circumstances stopped, the progress and productivity of economies. These economies are largely responsible for the production and manufacturing of materials, goods and parts for new machines.

Shipping
Shipping has been a main contributor to the shortages of parts and machinery, as well one of the key reasons for the rising costs of goods.

The global shipping container shortage is one reason why many original equipment manufacturers (OEMs), such as Caterpillar and Kubota, are struggling to get their compact machines on board ships for export. This was due to orders for new containers being cancelled during the pandemic, with market recoveries beating expectations.

Port issues in both the US and China have also been slowing trade routes and delaying the availability of ships to move cargo to their necessary destinations. Other incidents, such as the 2021 Suez Canal accident, created a lasting ripple effect which caused delays and schedule setbacks.

The cost of shipping goods has also increased dramatically. When you combine shortages, price spikes, travel delays, and throw in a rebounding world economy that is hungry to get back to pre-pandemic consumption, the result is a surge in demand with reduced supply. In some scenarios, this has resulted in shipping costs being 25% to 50% higher compared to the same time last year, with shipping between the US and China up an astronomical 350% in some cases.

Price
Due to the exorbitant shipping costs that global trade is experiencing, the prices of new compact machinery have increased significantly. Dealers are seeing ongoing inventory shortages due to delays from OEMS. For those receiving any stock at all, OEMS have had to increase their prices by 4% to 22% to dealers. For some buyers, this has priced them out of the new machinery market and instead, veered their attention to the used market.

Due to the shortage of new compact machinery and subsequent price increases, the used machinery market has become increasingly turbulent. Auction data from Pickles Industrial shows how prices have changed in the last year alone for near identical compact machinery.

A comparison of Kubota SVL75 Skid Steers demonstrates how demand is outstripping supply and potentially creating a price bubble.

In September of 2020, for instance, a Kubota SVL75 Skid Steer with 852 hours on the clock sold for $60,000. Fast forward to September 2021, the same model, with 835 hours, sold for $66,000 – a 10% increase. Incredibly, a model sold in November 2021 for $76,500, albeit with only 548 hours on the clock. Nonetheless, sales like these are only pushing the price ceiling further.

The recent sales of Kubota SVL75 Skid Steers are another example of the exploding used machinery market. In August of 2020, an excavator sold for $48,000 with a total operational use of 2,759 hours. Six months later, the same model with 50 additional operational hours sold for $52,000.

Chip shortages and raw material prices
Chip (or semiconductor) shortages have been plaguing many industries globally. The compact machine market has been unable to avoid the problem with manufacturers like Kubota and Caterpillar warning customers of compact machine supply shortfalls.

Materials, too, are adding to the strain of compact machine manufacturing as the price of steel and other raw materials continue to surge. A lot of this is to do with mining outfits getting back to 100% production capacity and catching up with demand due to COVID-19 closures.

Industry focus – equipment hire
Equipment hire companies are one of the industries experiencing the effects of compact machinery shortages.

One business that has experienced the disadvantages of machinery shortages is Orange Hire. The Brisbane-based equipment hire company has a compact machinery fleet size of around 140 5 tonne or smaller excavators and 95 track loaders, most of which are Kubota’s. This makes Orange Hire one of the largest owners of Kubota machines in Australia. A big part of Orange Hire’s asset goals is to maintain one of Australia’s youngest fleets. This is achieved by selling machinery around the 4-year mark, only retaining assets between 2 to 3 years of age. This makes Orange Hire an interesting study of the effects current market conditions have on enterprises, both experiencing and contributing to these market variances.

Asset & Disposal Specialist at Orange Hire, Jacob Webber, outlined the company’s 2022 outlook when considering the extreme delays of new equipment.

“As our goal is to keep our fleet young and reliable, the importance of acquiring new equipment as we dispose of older equipment is crucial. However, with OEM’s giving us delivery timelines of between 6 to12 months, we are finding it difficult to align this crossover.”

Jacob spoke of how offloading assets is becoming a tricky situation with such a strong used market currently at play.

“We are finding that the second-hand market is exceptionally positive where we are selling assets for a larger percentage of original cost than what we have experienced over the last 12 to 18 months. I see this as the used equipment market moving in line with the new equipment market, whereby the new price is increasing and that is dragging the used equipment price up with it.”

Due to the demand for hire equipment, buying used machinery has become a part of Orange Hires new strategy, as mentioned by Jacob.

“If we identify a compact machine like a skid steer or bobcat with a short usage life, we’ll look to acquire this asset as we know it will have a high rate of hire. Under usual market conditions this wouldn’t even be a consideration, but as we’ve seen, one must take advantage of the excellent hire demand we’re experiencing.”

The higher costs of new compact machinery have significantly impacted the future direction of the company. As Jacob details: “The costs of new machinery have certainly increased, but this is something we just have to accept. We understand that shipping costs have exploded recently, as have shortages of chips and other components which all contribute to the overall price point. A worry for us, however, is what the second-hand market will look like in 18 to 24 months. Will prices remain strong for us to recoup capital investment? Or will it have come off a great deal once more assets enter the market and demand wanes?”

The compact machinery market has become an increasingly interesting market to follow and one worthy of monitoring over time. We predict that the trend for higher priced assets will continue and stabilise well into 2022, due to a fluctuating market that has to deal with chip shortages and shipping constraints.