High interest rates halve construction machinery firms’ profits

[Courtesy of HD Hyundai Infracore Co.]

In stark contrast to the booming past two years, South Korean construction equipment companies have reported disappointing performances in the second quarter of 2024. Both advanced markets including North America and Europe, and emerging markets such as Latin America, are experiencing simultaneous slowdowns that are heavily impacting these firms.

HD Hyundai Construction Equipment announced its second-quarter 2024 earnings on Wednesday, revealing sales of 853 billion won ($617 million) and an operating profit of 58.6 billion won, a 17.4 percent decrease in sales and a 39.3 percent drop in operating profit compared to a year ago. The company attributes the decline to high-interest rates and a global construction market slump, leading to reduced demand for new equipment. Demand from advanced markets like North America and Europe in particular, and emerging markets such as Türkiye and Latin America, has been notably weak.

Regionally, the company’s North American sales fell by 15 percent on-year, amounting to 225.7 billion won. The strong dollar has weakened purchasing power in emerging markets. Direct exports to regions including Türkiye, the Middle East, Africa, Latin America, Oceania, and Russia saw a 35 percent on-year decrease, totaling 238.4 billion won while economic sanctions on Russia have virtually eliminated sales in that market. “North America is undergoing an inventory adjustment period, and Europe’s recovery is slow due to the war’s aftermath,” Shinhan Investment analyst Lee Dong-heon said.

Doosan Bobcat also posted its second-quarter earnings, with sales of 2.23 trillion won and an operating profit of 239.5 billion won, a 16.3 percent decrease in sales and a 48.7 percent drop in operating profit compared to the previous year. The company’s primary business is compact construction equipment, with North America accounting for 70 percent of its sales.

“In the first half of 2024, both emerging and advanced markets saw reduced demand due to high interest rates and a strong dollar. For Doosan Bobcat, infrastructure investments in North America are ongoing but labor shortages have delayed purchases,” Kiwoom Securities Lee Han-kyul analyst said.

Region-specific sales for Doosan Bobcat fell by 22 percent in North America, 16 percent in Europe, the Middle East, and Africa (EMEA), and 10 percent in Asia, Latin America, and Oceania (ALAO).

HD Hyundai Infracore, another major player in the Korean construction equipment industry, reported lackluster second-quarter results. The company recorded sales of 1.11 trillion won and an operating profit of 81.5 billion won, reflecting a year-on-year decrease of 15.7 percent in sales and 49.7 percent in operating profit.

Industry analysts anticipate a gradual recovery in construction equipment demand starting in the second half of this year. “The European Central Bank has begun lowering interest rates, and the U.S. and the UK are likely to follow suit in September. Recovery is expected to pick up pace from the third to the fourth quarter,” Kiwoom’s Lee said.

In a conference call, HD Hyundai Construction Equipment said, “While demand adjustment will continue due to delayed interest rate cuts, the decline will be less severe compared to the first half of 2024 after dealer inventory adjustments.”

The company also expressed optimism about a potential recovery in the Russian market if former President Donald Trump wins the upcoming U.S. presidential election, saying, “Trump lifted sanctions related to Russia during his previous term. Russia’s annual market demand was around 11,000 to 16,000 units before the Russia-Ukraine war.”