Materials handling rock-steady in 2008

An economist, a 3PL analyst and an investment specialist say materials handling equipment and services represent areas of stability in an otherwise uncertain economy.

By Tom Andel, Editor in Chief -- Modern Materials Handling, 2/4/2008

People involved in materials handling and logistics have told Modern they’re optimistic about the economic road ahead, but that optimism was more gut feel than GDP analysis. Those people will be happy to know their gut wasn’t far off the mark, based on analyses offered by three market experts who participated in Modern’s “Industry Outlook 2008” Webcast, broadcast last week and available now on demand.

First, Jim Haughey, director of economics for Reed Business Information—Modern’s parent company—said he expects materials handling equipment shipments for 2007 will be up 8.4% when the final numbers come out, and he expects that number to hold throughout this year. That’s in spite of a slight overall rise in prices.

“We think prices will creep up 0-1%,” he said. “Those things with a lot of steel in them will go up more because steel prices will soar 15-20%. Otherwise pricing will be weaker. In warehousing, the amount of square footage of new warehouse starts will be about steady compared to last year. We’ll see a little deceleration in freight rates and [oil will] get down to $70 a barrel later in the year. Overall it will be a holding year.” 

Richard Armstrong, a third-party logistics expert specializing in supply chain evaluation and outsourcing, said 3PL activity will remain strong and consolidation will continue in this market as demand for logistics services grows.

“Growth in 3PL has been 3 to 4-1/2 times the growth in GDP since we started tracking this in the mid 90s,” Armstrong said. “About 74% of the domestic Fortune 500s are using a 3PL or a group of them and 91% of the Fortune 100 are using at least one. Meanwhile, consolidation continues. There are 20-25 companies with the capability to handle a division or continental presence for a Fortune 100 company. These same companies have the presence to be the single 3PL on a global basis for companies in the Fortune 500-1000 range.”

Finally, Michael Howell, managing director at Downer & Company, an independent, global investment bank, said that the number of transactions involving materials handling companies has grown at a pace far greater than the overall market as a whole. He spoke about the consolidation going on in what he termed “a fragmented market” made up of niche players.

“There’s been a need to eliminate excess capacity in certain sectors of the market as well as a pursuit of new technology,” he said.  “Since 2001 there’s been a 4.7 times increase in the number of materials handling deals, going from a low of roughly 26 deals in 2001 to a high of 121 deals in 2007.” That’s roughly two times the increase seen in the market as a whole.

Howell predicts 2008 will be another busy year for mergers and acquisitions in the materials handling market. In particular, he expects companies in the U.S. materials handling industry to remain attractive acquisition targets for overseas investors.

“For the first time in my recollection the U.S. has become a low cost country for manufacturing and strategic acquirers are seeking to leverage their strong currency to take advantage of assets they perceive in the U.S. to be largely inexpensive,” he concluded.