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Construction Industry Insight | Fall 2020

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This document focuses on a number of topics that pertain to the construction industry as a whole, including impacts from the second wave of COVID-19, technologies that can change the industry, growth expectations for various construction markets, the potential effect of the presidential election on infrastructure spending, and plans for one of the largest U.S. coal producing companies to exit the production of thermal coal. It also includes a brief summary of trends in used equipment values.

Construction Industry Adversely Impacted by Second Wave of COVID-19: According to the latest survey taken by the Associated General Contractors of America (AGC), business impacts from the second wave of COVID-19 are reverberating through the construction industry, and those consequences are getting worse as the pandemic wears on. During a virtual news conference held on October 28, Ken Simonson, AGA chief economist, said more contractors reported postponed or canceled projects than new starts. Of the contractors surveyed, 75%, said they’d had projects pushed out or eliminated completely, up from 60% in August and 32% in June, while only 23% reported working on new or expanded jobs. The survey results show that the ongoing pandemic is undermining demand for projects, disrupting vital supply chains and clouding the industry’s outlook.

When it comes to making long-term investment decisions, investors are pulling back on future construction until they can be more confident that the economy is recovering on a sustained basis. The pandemic appears to be having the greatest impact on the largest contractors. Simonson said 88% of firms with revenues of $500 million or more reported postponed or canceled projects, but only 73% of firms with revenue of $50 million or less reported the same. Severe material shortages and supply chain issues are creating delays on projects that have remained open. Seventy-eight percent of survey respondents said they were experiencing delays in ongoing jobs, up from 57% in June. As a result of the above factors, over the past year employment numbers for contractors have gone down in 234, or 65%, of 358 metropolitan areas. Additionally, the majority of firms report they plan to cut jobs or at least keep employment level over the next year. While a boom in residential construction means overall construction employment numbers have risen, Simonson said that masks the decline in nonresidential jobs and it could be sometime, even after a vaccine is in place, before construction returns to normal.

Top 10 Technologies That Can Change the Construction Industry: Technology has carved a path for itself in every industry, and construction is no exception. Within the field of technology is an array of elements that have changed the way construction is perceived and executed. Ten of those that are gathering acceptance and support amongst the builders, contractors, workers, and buyers are as follows:

  1. Drones. Drones are now being used at sites with out of reach terrains to conduct surveys which help in deciding upon the appropriate strategies. They have become an important tool in the construction industry as the accuracy and precision with which they report information create a difference in the way the construction process takes place.
  2. Wearables. Construction sites have been home to numerous accidents. To improve the safety of workers, wearable technology in the form of armbands and 3D glasses is being used to ensure the worker is well connected with the supervisor who can constantly monitor the situation and trigger an alert if anything out of the ordinary occurs.
  3. RFID Tags. Radio-frequency identification (RFID) tags use bar codes to identify specific items. They are attached to materials such as cement, bars, etc. to alert management of any potential shortage of materials that could result in work delays at the construction site. In addition, they are being used on equipment and vehicles to track service history, to access to parts/maintenance manuals and to track job sites.
  4. Augmented Reality. Augmented Reality is the ability to see the actual world through a camera lens. Required dimensions are input at the site and these lenses give a picture of how the end product would appear. As a result, users of this technology can make meaningful changes in their approach to construction.
  5. Concept Vehicles. Excavators, dump trucks, cranes, and bulldozers are managed and controlled by supervisors at a distance to access places where manual intervention isn’t possible. From the point of excavation to the delivery of materials, everything is taken care of through the use of automated vehicles. Caterpillar MineStar is one specific example of such technology that is being used in the mining industry in conjunction with the management and control of large off-highway vehicles and bulldozers.
  6. Prefabricated Construction. This approach to construction has caught on rapidly. The primary elements of an infrastructure are pre-installed in a factory and then moved to the site of construction. As a result, significant time is saved in the overall construction process.
  7. 3D Printing Technology. Architects are using a cost-effective tool known as 3D printing to create perfect 3D models to reach an understanding of how proposed infrastructures would hold up.
  8. Software and Mobile Technology. Through enhanced communication systems, worksite data can be immediately transferred to a handheld device, thereby giving supervisors hands-on information regarding the performance of workers, their time cards, expense reports, etc. Many builders and contractors are using this technology to analyze existing scenarios and consider other alternatives.
  9. Robots. Some construction companies are using robots to take over some of the less complex tasks such as bricklaying or rebar tying. Once programmed, these robots work continuously to make sure the task is completed on time. By using a uniform approach, they are also effective in upgrading product quality.
  10. Self-Healing Concrete. Over time, regular concrete develops cracks. However, new technology has improved concrete such that when water enters a crack, the bacterium that has been added during the mixing process gets activated and the process of healing starts due to the excretion of calcite.

Which Construction Markets Will Grow, Decline in 2021: According Ed Sullivan, Portland Cement Association (PCA) senior vice president and chief economist, contractors serving the housing market are in the best position going into 2021. Although unemployment is up, he believes that many of the demographic sectors that are buying homes are less affected. In remarks outlining PCA’s fall forecast Sullivan said, “Housing starts are expected to reach 1.3 million this year and 1.4 million next year. Among the residential, nonresidential and public construction sectors, housing will be the steadiest and strongest performer throughout the near-term cycle.”

Sullivan noted that consumer sentiment, which accounts for two-thirds of all economic activity, is hinging on how COVID-19 infections play out this year and next. He believes that the longer this goes on, the more stress it puts on small business, which will be a fundamental factor in terms of the growth rate of the recovery. This in turn is one of the many factors accelerating the decline of the nonresidential market, which is also being pummeled by vacancy rates and the growing reluctance of bankers to lend to commercial real estate entities. Sullivan says he doesn’t see these impacts unwinding until perhaps 2022 and expects that the largest cement consumption declines will occur in the retail, hotel and office markets.

Public construction represents another area of risk. Sullivan stated, “There have been tremendous disruptions in state revenue collections. It gets a little bit better next year, but it’s still bad.” According to PCA forecasts, cement consumption will see modest declines of 1.5% over the remainder of 2020, and 0.9% in 2021. This forecast is based on the weighted average of three economic scenarios, all of which assume a significant increase in COVID-19 infections during the fourth quarter.

Presidential Election Could Bring About Surge in Infrastructure Spending: The Presidential election could usher in a new era for the U.S. infrastructure industry and a boost in stocks. The combination of a dwindling highway trust fund, high unemployment and Democrats’ desire for more green energy initiatives has created an expectation of large-scale government spending. Investment firm Jefferies, for example, said in October that the chances for increased federal spending on infrastructure were “the brightest in recent memory.”

Democrat Joe Biden’s infrastructure plan, as outlined on his website and the campaign trail, is wrapped together with green energy initiatives in a $2 trillion package. It calls for spending on roads, bridges, transit and the electric grid, among other things. On October 19, Goldman Sachs said that it expected the plan to result in “a few hundred billion dollars” of infrastructure spending over Biden’s term, with additional money and tax credits for green energy projects. Meanwhile, President Donald Trump has repeatedly floated the idea of a major infrastructure plan during his tenure, with proposals coming from the GOP-controlled Senate and the Democratic House, but no deal has come to fruition.

Arch Resources to Reduce Coal Mining in Wyoming by 50%: On October 22, Arch Resources, the second-largest coal producing company in the U.S., announced that it will be accelerating its efforts to exit its production of thermal coal. Thermal coal is primarily used in generating electricity through power plants and is found in the Powder River Basin of Wyoming, where Arch plans to make large reductions. In 2019, the company mined nearly 75 million tons of coal, a figure the company says will drop to less than 55 million tons this year. Over the next 2 to 3 years, Arch expects to reduce production by another 50%.

The winding down of thermal coal operations is part of the company’s “rapid pivot” toward steel and metallurgical coal markets, sparked by the end of the Peabody joint venture in which the goal was to boost coal’s competitiveness. In June 2019, Arch and Peabody reached a deal to combine assets in the Powder River Basin and in Colorado as part of a joint venture operated by Peabody, which would own a majority of the business. However, the Federal Trade Commission alleged in an administrative complaint filed in February that the move would eliminate competition between the firms. Peabody and Arch canceled the venture in late September, saying the U.S. District Court upheld the FTC’s efforts to block the deal. At the time, Arch said it was already directing more than 95% of its 2020 capital budget to the production of metallurgical coal. The demand for metallurgical coal is highly coupled to the demand for steel, which is starting to rebound since many plants closed operations during the second quarter.

Arch shares have declined nearly 32% since reaching $52.90 on September 19, and nearly 57% from a year ago, when they traded for $86.

Trends in Used Equipment Values
COVID-19 has impacted the heavy equipment industry in numerous ways, from manufacturers having to temporarily shut down to others shifting their efforts to produce needed medical supplies. Through July, orders for construction machinery in the U.S. were down $31.4 billion, or 9.4%, from the year-ago level. On the agricultural side, machinery production has seen some increases, but is also down in both the U.S. and Europe. While near-term recovery in this sector is currently anticipated for Europe, declining U.S. exports are likely to contribute to downside pressure into early 2021.

As OEMs have reduced their production levels in response to the decreased demand for new equipment, used equipment sales and the rental equipment market have reaped the benefits. At the same time, the current circumstances have bolstered the continuing trend toward adding technological advancements such as digital services for automated service enhancements, equipment service tracking, and mapping features to used equipment. Consequently, prices for most used equipment have remained stable. In the current market, equipment in good condition with lower hours of service is often priced at a premium, while prices for equipment in lessor condition with higher service hours continue to decline. In either case, the age of the equipment is not always a critical factor in determining its value.

Despite the near-term decline in heavy equipment sales due to the COVID-19 pandemic, demand is set to regain traction and expand over the next decade. The outbreak of COVID-19 has interrupted the growth of construction, mining and other industrial activities. Nevertheless, the leading indicators for both the U.S. and Europe have risen for four consecutive months signaling potential recovery and expansion of the industrial sector during the first half of 2021. A new study conducted by Fact.MR, an independent market intelligence firm, shows that demand for construction equipment is set to regain traction as governments in both developed and developing countries invest in infrastructure development projects. Efforts to build highways, dams, railways and roads as part of developing smart cities in the areas of energy, mobility and government are expected to further drive construction equipment sales for the foreseeable future. As a result, the global construction equipment market is expected to reach a market valuation of $180 billion by the end of 2030.