If you are planning to buy new equipment this month and take advantage of the bonus depreciation program that expires Dec. 31, there’s a good chance you won’t be able to do it. And the steel shortage that erupted at the beginning of this year is part of the reason why.
“It’s fair to say that if you’re in parts of the country where demand is strong, you’re not likely to get equipment you order today by next week or by the end of the year,” Christian Klein, legal counsel for the Associated Equipment Distributors, said in mid-November.
In some cases, lead times are out to the second quarter of next year. On the other hand, some contractors will be able to go into a dealership Dec. 31, buy a machine and qualify for the depreciation bonus, Klein says.
The bonus depreciation regulations require you not only to purchase new equipment, but also place it in service before January 1. As far as construction equipment goes, Klein says “placed in service” means a machine has to be in the contractor’s fleet and ready to go. The accelerated depreciation plan allows you to write off 50 percent of the cost of new equipment for the year it is placed in service. This is in addition to the 20 percent you can write off under normal IRS rules.
AED tried to get Congress to extend the depreciation bonus through the first quarter of next year, but legislators turned the plan down, saying the cost was too high.
Steel and equipment prices
A more far-reaching effect of the steel shortage and increased costs for raw steel is the impact on equipment prices. Most construction equipment manufacturers have raised their prices between 1 and 6 percent this year.
Manufacturers report they are paying 40 to 50 percent more for the steel they’re buying now compared to last year. And they expect prices to continue rising at least during the first half of next year. “The bottom line is it’s not going away,” says Nick Yaksich, vice president of government affairs for the Association of Equipment Manufacturers. “It’s just unprecedented, what manufacturers are seeing as far as steel prices. Steel consumer groups we participate in see few if any signs the world market for steel is stabilizing.”
While manufacturers’ overall sales are up considerably this year in the face of increased demand for their products, higher costs for materials, particularly steel, are taking a bite out of profits. The challenge for manufacturers, Yaksich says, is finding a way to stay competitive while managing in these inflationary times when demand for their products is so strong.
Caterpillar announced at the end of September it would raise machine prices by 3 percent on January 1, following a 3 percent increase this past July. The increases were at least partially in response to higher steel costs.
In the company’s third quarter financial report, chairman and chief executive Jim Owens said: “While we’re pleased with the profit improvement delivered this quarter, higher material costs and inefficiencies related to supply chain bottlenecks affecting our global industry limited the profit pull-through we would expect to see with this strong sales growth. Looking forward, continued global economic growth will likely sustain external cost pressures in the near term, but we are aggressively managing this upturn with a determination to improve our cost structure.”
Two Terex groups also announced steel-related price increases recently. Terex Aerial Work Platforms will increase prices 6 percent for all products shipped on or after January 1. Bob Wilkerson, Terex executive vice president and president of the aerial work platforms group, said the industry as a whole is dealing with margin pressure as a result of sharp increases in steel prices, and he expects the company’s relative pricing position to remain about the same.
Terex Cranes increased prices 4 percent to 6 percent – depending on make and model – across all product lines worldwide November 1. Steve Filipov, president of Terex Cranes, said the move was necessary to offset pressure from vendor pricing on items such as steel and tires. The group also added a surcharge for certain components such as unusual counterweights, for which it says its vendors have increased prices 50 percent or more.
“We estimate steel cost increases alone negatively affected our operating results by roughly 31 million in the third quarter,” says Ron DeFeo, chairman and chief executive of Terex. “That equates to a margin of 2.5 percent overall. We are behind the curve in certain businesses from a pricing perspective, but we have aggressive plans to catch up.”
How manufacturers contain costs
If you are a contractor who uses a lot of steel building materials, the increase in equipment costs is probably barely noticeable compared to this year’s 40 to 100 percent hike in steel material prices.
Equipment manufacturers pass on only a fraction of the increased percentages they are paying for steel because machines consist of many other non-steel components, says Ken Simonson, chief economist of the Associated General Contractors of America. “The steel cost gets diluted a lot by the time you unload a tractor at the site,” he says.
Manufacturers are also taking cost-reduction measures in order to limit price increases. Many are sourcing steel globally in an effort to find low prices. Other strategies manufacturers are trying include eliminating steel from certain applications and recycling their own scrap steel.
“If you talked to 10 manufacturers you would find 10 different approaches to how they are handling the significant steel issues from temporary surcharges to price increases to making adjustments throughout the supply process,” Yaksich says.