By TOM ORLIK
Falling sales of excavators suggest the construction sector sees a hole in the road ahead for China's growth.
Sales of excavators are down 10.4% year on year in May, according to data from China Construction Machinery Network. Weak demand for earth-moving equipment is bad news for industrial companies world-wide. Excavators are one of the few sub-sectors of the Chinese construction equipment market still dominated by foreign firms like Caterpillar. Western, Japanese and Korean companies accounted for two-thirds of the market in 2010, according toDeutsche Bank.
It's also a blow for local manufacturers, who have been making great strides amid China's construction boom, increasing their market share from just 5% to a third over the past decade. Firms like Sany Heavy Industry and Changsha Zoomlion have made massive investments in increasing production capacity. Victoria Li, an expert on the construction machinery sector at Credit Suisse, said that Sany has plans to increase production to 80,000 units in 2012, compared to sales of 13,393 in 2010, and now faces lower sales growth and tighter margins.
Falling excavator sales also point to a worrying outlook for China's growth. A look back at the only two previous occasions when sales growth fell into negative territory provides little reassurance. The first was in spring 2004, when concerns about overheating meant restrictions on lending, an increase in the reserve requirement ratio—not a monthly occurrence back then—and a moratorium on land sales. Paul Cavey, China economist at Macquarie, said that the results of that tightening did not show up in the industrial output data, but were evident enough in the price of equities, which fell 27% from a peak in March to the end of the year. The second was in October 2008, the beginning of the financial crisis that rocked the banking sector.
This time around, the headline growth figures show little sign of collapse. Industrial output held steady in May and investment in real estate remains robust—up 34.6% in the first five months of the year. But if the government holds its nerve on property sector controls, restrictions on demand from speculators and an overhang of supply will surely reduce investment by private developers. A push to break ground on 10 million affordable homes this year is meant to keep the earth movers in motion, but the early signs are that meeting the target will be challenging. As of the end of May, just 30% of planned construction in affordable housing has been started.
The base case remains a soft landing for the Chinese economy. But a drop in sales of excavators shows that the firms in the thick of China's investment- and construction-led growth are not taking any chances.
Write to Tom Orlik at Thomas.firstname.lastname@example.org