Digging for growth in China? Not quite yet, say excavator makers

Not so, say dealers, consultants to the industry and construction equipment manufacturers themselves: a stronger start to 2016 is less the start of a tepid recovery than a temporary blip. It is only masking continued pain for a sector that flourished during the construction frenzy that propelled China past the global financial crisis.

New emissions rules drove sales, but factories that once churned out excavators and loaders are still working only at a fraction of capacity - as little as 20 to 25 percent, they said.

Choking off new sales, machines bought at the peak are still barely used, while fleets of equipment seized from bankrupt contractors are clogging the second-hand market.

Rosier economic indicators earlier this year - including a pickup in construction - prompted more than a few economists to revise higher their predictions for China's 2016 growth. April data, though, is less robust, raising concerns that any resurgence may be fizzling out.

A view of an open marketplace for heavy construction machines is seen on the outskirts of Beijing, China May 4, 2016. Photo by REUTERS/Fang Yan

A Reuters reporter's visit to dealerships on Beijing's outskirts found a half-empty dealer compound and deserted forecourts, where new excavators and forklift trucks still in their packaging were lined up alongside battered used models. There was no sign of buyers.

Speaking at a dealership in Beijing's northeastern suburbs that sells Guangxi LiuGong Machinery Co's equipment, manager Dang Yongli said that at the peak, he could barely keep up with demand for new machines.

"Many customers just couldn't wait. They would go to LiuGong directly, and line up outside the workshop," he said.

Now, two out of every three machines he sells are used.

The slack in the system means even the world's largest heavy equipment maker, Caterpillar Inc, cautiously optimistic and more positive than some, urged caution last month.

Back outside Beijing, Han, a salesman for domestic brand Lonking Holdings said January to April saw growth in large part because of new emissions rules that had customers pulling forward purchases to get cheaper deals. He said the demand won't hold.

"We've been losing money, and we still are," shrugged Han, who would only give his surname.

TOO MANY MACHINES

One of the main problems - dampening government efforts to revive growth - is overcapacity.

Chinese and foreign companies, caught out on the way up after 2008, poured money into factories and output. When the slowdown hit, many were suddenly producing so much they were forced to seek export markets instead of selling in China.

In 2015, according to Off-Highway Research, a consultancy which analyses international construction equipment markets, output touched its lowest level since 2003.

"The impact of government investment seems to be not as strong as previously, which could be because there are too many machines out there already," said Liu Chunyu, vice president of the domestic sales division of Shantui Construction Machinery , China's biggest bulldozer maker.

"We know the breakneck growth we saw back in 2010 will never come back again."

A view of an open marketplace for heavy construction machines is seen on the outskirts of Beijing, China May 4, 2016. Photo by REUTERS/Fang Yan

Japan's Komatsu said last week that Chinese government efforts were failing to revive sluggish demand, forecasting a sharp drop in full-year growth for the group as a whole. Chinese demand alone could fall by as much as 25 percent, it said.

"There's little change, in that we're seeing a slowdown," said Chief Financial Officer Mikio Fujitsuka.

This isn't to say that the sector, like the rest of the economy, hasn't seen some improvement from its darkest days.

Inventories were over 12 months at the nadir but are now closer to normal levels. For Zoomlion, for example, they are equivalent to three to four months - not far from their two-month norm, one senior executive at the company said.

But excess capacity remains a major headache, from the booming second-hand market to barely-used existing machines, factors which David Phillips, managing director at Off-Highway Research, estimates will take another 12 to 18 months to work through.

That holds even if some pockets revive first: road work or water conservancy projects, for example, already pepping up machines like road pavers - whose sales grew in 2015. Leading suppliers in that business include China's XCMG, Germany's Vogele and Sany.

But there is still too much slack.

"There are too many machines out there facing too little work," said Phillips. "And they are not being replaced as quickly as they should be."