We hear every day how low inflation levels are and have been. According to the government, prices are hardly moving —
though when we’re at the grocery store
or the gas station, something seems out
of whack. Prices seem to be jumping a
lot more than the 2 or 3% figure cited
by the Consumer Price Index (CPI), but
then the CPI doesn’t include food and
Aside from that, let’s look at how
machinery prices are shaping up this
year based on conversations I have
had in recent weeks with a few of the
big OEMs. The bottom line is that we
have a mixed bag — some machines
are getting inflation-rate price hikes of
about 2% above 2013, while others are
getting a bigger bounce up to perhaps 5
to 6% above previous levels.
What’s this all about? A little background is required for those not familiar
with the changes in engine emissions
regulations for off-highway equipment.
The Environmental Protection Agency
(EPA) has been moving big machinery
closer and closer to the emissions requirements of trucks and automobiles
and everything else that falls under its
regulatory purview. For several years,
we have been undergoing significant
upgrades to engines to emit less pollution, which has been costly to the industry overall. We are approaching the final
stages of the Tier 4 requirements that reduce the gaseous emissions and particulate matter levels from engines to about
5% of what they were 10 years ago.
The Tier 4 final deadline on engines
175 to 700 hp took effect in January, which
means higher prices for the machines
being equipped with the newer, cleaner
engines. Making changes to engines is
not cheap and the engine manufacturers
have been swallowing a lot of testing, research and certification expenses.
Therefore, prices for new machines
carrying new 2014 Tier 4 engines are
escalating, up from 2 to 6% generally
speaking. Machines that already carry
Tier 4 engines — equipment with smaller,
lower-horsepower engines have already
taken their medicine and seen their price
increases, thus are closer to more stable
pricing, which is a good thing.
One needs to understand that machine prices have been annually priced
higher, exceeding the inflation rate for
several years as higher costs for engines has gradually been stepped up
to ease or avoid a one-time pop of 15%
or more, which would have happened
had the incremental changes not taken
place. Engine suppliers have managed
the inevitable step function increase
very well and OEMs have dealt with
it accordingly, passing the increases
along to the retail side of the business.
Obviously, the end customer is the one
paying for the emissions improvements.
This process of pricing Tier 4 engines
into the domestic market (U.S. and Canada) will continue into 2015 as OEMs
meet the new standards with products
not yet carrying Tier 4 engines. In my
opinion, it is not a question of meeting
the EPA’s standards. The only questions
are timing and technology, and both issues have been resolved by the engine
suppliers and industry manufacturers.
Shifting gears a bit, next month will
see many of us trekking to Las Vegas
for ConExpo-Con/Agg 2014. It’s always
an exciting and interesting week, not
only for the attendees but for those man-
ning the stands and meeting the throngs
of visitors. I am sure this will be a well-
attended event this year, and we’ll be
hearing a lot of upbeat comments about
how business is going and that many
new orders for machines and new busi-
ness are rolling in. You have to love it!
I am still reserved about the outlook
for 2014 as I was in my “Forecast 2014”
(see September 2013 Diesel Progress),
when I saw little or no improvement in
business. We won’t see much change
in Washington during the coming 10
months before the election. Congress
will languish over most of the agenda
with little or no directional change for
any of what needs to get done.
Along with that, we still have rising interest rates, a lack of business investment
to make things move again and no improvement in capital spending at the government level. The private sector will definitely continue to muster some change for
the better, which will be the only way we’ll
see growth in machine sales.
I am looking for housing to show signs
of growth. However, I am looking for new
starts to fall in the 1. 1 to 1. 2 million unit
range, which is far below what could be
As for nonresidential construction, it
will grow, but not at a breakneck speed.
Mining is a segment that everyone
would love to see jump back to life, but
it will not in 2014. I think we are at the
bottom of the cycle this year, and mining haul truck sales and orders for new
hydraulic shovels will likely be slow
Have patience. I am expecting 2015
to be the real turnaround for this sector, with a lot depending on the Chinese
economy and improved business conditions from that part of the world.
In any event, ConExpo should be
refreshing for all of us. See you in Las
What’s Happening With
Machine Prices This Year?
www.yengstassociates.com — email@example.com
CHARLES R. YENGST IS
10 DIESEL PROGRESS NORTH AMERICAN EDITION February 2014