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[ANALYSIS] Heavy equipment outlook 2021: Light at the end of the tunnel?

Adjie Harisandi (The Jakarta Post)
Jakarta
Wed, December 23, 2020

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[ANALYSIS] Heavy equipment outlook 2021: Light at the end of the tunnel?

T

he COVID-19 pandemic that has taken hold since early this year has depressed all economic sector performances, including the heavy equipment sector. The sales performance of heavy equipment in 2020 is expected to be the worst in the last seven years.

COVID-19 has depressed the heavy equipment sales in two ways. First, the pandemic itself, has depressed commodity prices, especially mining commodities, and reduced the mining sector's production activity and heavy equipment needs. The second way has been as a result of limited mobility due to large-scale social restrictions (PSBB).

It is estimated that cumulative heavy equipment sales from January to October 2020 only amounted to 4,483 units, down by 47.5 percent compared with the same period in 2019. In more detail, according to United Tractors data, heavy equipment sales have declined in all sectors. The most profound decline occurred in the mining sector, which dropped by 59.1 percent, while the other sectors also have experienced slides, such as agriculture, which dropped by 49.5 percent, construction by 45.1 percent, and forestry by 40.6 percent.

What is the projection for heavy equipment sales next year?

We predict that the sales performance of heavy equipment will be better than in 2020. Heavy equipment sales will potentially grow 5.9 percent to 6,123 units from the estimated heavy equipment full-year sales in 2020 of only 5,883 units.

Signs of improvement have been seen in the monthly sales performance from June to October. After touching the lowest monthly sales point in May at only 176 units, heavy equipment sales gradually increased to 641 units in October.

Furthermore, some fundamental data also lead to positive expectations for heavy equipment sales next year.

First, mining commodity prices in the second half of 2020 started to increase. Some commodities are even above the price level at the end of 2019. For example, the Newcastle coal price on Dec. 18 reached US$79.5 per ton, up 16.1 percent year-to-date (ytd). Likewise, the nickel price reached $17,517 per ton, up by 36.3 percent ytd. In the future, we forecast the average price of these two commodities will be better than in 2020. The higher coal and nickel prices in 2021 will encourage mining production activities and ultimately increase the need for heavy equipment.

Second, other than a price increase, those commodities' production volumes will also increase in 2021, especially coal. The main factor for a coal production increase is the China Coal Transportation Distribution's commitment to buy 200 million tons of Indonesian coal in 2021 with a sales value of $1.46 billion. Indonesian coal exports to China in 2019 were only 147.4 million tons. Therefore, if this agreement is fully realized, there will be an increase of 52.6 million.

Third, in line with the increasing commodity prices trend, mining companies’ capital expenditure is expected to be higher in 2021. Referring to a JP Morgan report, global mining companies' capital expenditure will potentially increase by 6.3 percent in 2021, better that the figure in 2020, which contracted by 3 percent. Mining commodity prices, which have experienced a significant increase, are the main driving force for increased capital spending by mining companies globally.

In Indonesia, signs of an increase in mining companies' capital expenditure have also been seen in the announcement of an increase in capital expenditure plans for several large miners. For example, Delta Dunia Makmur plans capital expenditure of up to $100 million, much higher than the expected realization in 2020. Better coal prices next year are the main reason driving the increase in Delta’s capital spending. As a comparison, Delta's capital expenditure as of the third quarter of 2020 was only $18 million.

Lastly, the significant increase in infrastructure spending will promote the demand for heavy equipment in the construction sector. Infrastructure construction activities that were delayed in 2020 are expected to resume in 2021. This can be seen from the increase in infrastructure spending in the 2021 state budget of Rp 414 trillion ($28.43 billion). The budget is an increase of 47.3 percent from the estimated 2020 realization of infrastructure spending of Rp 281.1 trillion. The infrastructure spending in 2020 is estimated to have contracted by 28.7 percent.

Although many positive factors can improve heavy equipment sales in 2021, we also see risk factors that could suppress heavy equipment sales. The main risk factor is the potential for a second wave of the COVID-19 pandemic. Assuming the second wave of the COVID-19 pandemic occurs in 2021, commodity prices could be depressed again, which will reduce mining activities and decrease the demand for heavy equipment.

Another potential obstacle to future heavy equipment sales is the reluctance of finance companies and banks to provide loans to the mining sector as a result of high non-performing financing (NPF) at financing companies and non-performing loans (NPLs) among national banks.

The Financial Services Authority recorded the NPF position in October at 4.97 percent, much higher than the NPF in October 2019, which was only 2.52 percent. Meanwhile, the NPL in September was 3.14 percent, higher than the 2.66 percent in September 2019. With relatively high NPF and NPL rates, national financing companies and banks may tend to hold back the pace of providing financing and loans in the future, including to the heavy equipment sector.

With the various factors we have mentioned, therefore, we tend to be cautiously optimistic about heavy equipment sales in 2021.

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Industry analyst at Bank Mandiri

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