Is auctioning the answer to cash flow problems?
Buying or renting - the big question in these uncertain economic times
With the construction industry stifling under a thick air of uncertainty, the question of whether to buy or rent the plant needed to carry out jobs underway has become vitally important to cash flow. Construction Week asks: are auctions the answer?
In the past few months the Middle East’s construction sector has changed dramatically. At this time last year resources were so scarce that firms were employing staff in advance of tenders being signed in order to prove their ability to complete the work.
Now many firms are working from job to job, employing only those staff essential at the time and keeping standing assets to a minimum; finances are being tightened and a firm’s every cost is being scrutinised.
One of a construction firm’s biggest initial outlays for a project is that for the plant and machinery needed for the build process. Without the suitable equipment being available to the construction team as and when needed, critical time delays can be incurred.
And while some firms may have fleets of machinery at the ready, for others the question is how to acquire this plant to meet their needs cost-effectively. “The golden rule is to own 70 % of your plant requirements that are needed for six months or more; rent 30% maximum of a project’s plant requirements; and preserve internal cash flow by using company-owned machinery,” states Keith Lupton, general manager World Wide Auctioneers (WWA).
Hiring or buying may be the two options that first spring to mind to gaining the necessary plant, however a third choice does exist – auctions. But how do these operate and what are the potential benefits of taking part?
The auction market
Two of the biggest advantages of using an auction to procure plant are the wide range of products available in a single sale and the relatively low cost of these items.
“Auction prices are, if not lower, at least avoiding the middle-man’s cut. It is a cash-quick settlement business and provides immediate availability to fill an immediate need,” states Lupton. “If you have a project that will last two to three years, why buy new equipment that has a guarantee for ten years, but will have its biggest depreciation value [over this initial period]? Why not buy second-hand?” reasons Tom Cornell, managing director Europe, Iron Planet.
Being able to acquire all the equipment needed for a project from a single supplier is a strong benefit and adds to potential time savings.
“Bidders can view a diverse range of equipment brands at one convenient location…and equipment purchased at an auction is available immediately,” stresses Steve Barritt, Ritchie Bros Auctioneers (ME) regional manager Middle East, Red Sea, Turkey and South Africa.
The fast downturn in the global economic market has meant there is currently an extremely large amount of equipment available at such auctions. As well as second-hand machinery being offered by sources such as plant hire firms and contractors, new plant is also available.
“Think of the investment that a manufacturer has made over the last ten years to meet demand…the economy burst happened very quickly and it’s taken a long time to wind down [the manufacturing plants],” explains Cornell.
And the variety of plant on offer is as large as the volume. “There is absolutely everything from cranes, excavators, dozers and loaders to pavers, profilers and batch plants. That’s not to mention the trucks, buses and pick-ups, or the generators, compressors and pumps,” states Barritt.
With the immediate nature of auctions, the type of plant local buyers are seeking at sales generally follows the current construction landscape, with the competition for this equipment attracting the highest number of bidders.
In the Middle East, the changes over the past few months in terms of the types of projects that are going ahead has become evident in the auction houses. “Items for villa construction are on an evident downturn, for example,” reports Lupton.
“The Arabian Peninsular has huge infrastructure demands and has always had a huge demand for road building plant such as motor graders, bulldozers, wheel loaders, mobile cranes, track-mounted pipe layers, hydraulic excavators and Mercedes trucks,” he adds.
Your demand comes from every corner of the world and if our registered bidders can’t be at the auction facility in person, they will normally register to bid live and in real-time, on-line,” explains Barritt. “If the there is an over supply of a particular equipment item in the local market, we will identify an overseas market that has a demand for the item,” he adds.
The increasingly global nature of auctions has been behind the success of dedicated online auction firm Iron Planet, reports Cornell. Launched in the USA in 1999 and aimed principally at the construction and agriculture industries, the firm has grown by 50% annually since 2006.
It began operating in Europe in late 2008 and held the first of its monthly auctions in January 2009. At the time of writing, the interest from Middle East buyers in the firm’s European operation was growing significantly, with 25% of the pre-auction bids for it’s 25 March auction coming from the region.
“There are a lot of people around the world [who are] willing to buy construction equipment online…and people are prepared to transport equipment huge distances,” states Cornell.
“Currency is the great determinator and the strength of local markets...The plant and equipment business will buy where prices are attractive,” adds Lupton. “Europe at the moment is bargain basement and the UAE dirham is strong against the GB Pound,” he stresses.
Taking part in an auction as buyer or seller is kept as simple as possible assure the auction firms. Deposits are generally required to ensure the financial competence and serious intentions of buyers and the turnaround of equipment after a sale is kept to a minimum. And with interest in auctions rising, the operations of the firms holding them are increasing.
WWA employs multilingual staff to aid interested parties and its website includes both English and Arabic instructions; a dvd explaining the auction process is also offered. The firm has held auctions in the Middle East since March 2001 and currently holds six auctions per year, with a deposit of US $27,500 (AED100,000) being required in order to obtain a bid book. It is planning to expand into the Levant and USA, adding to its operations in the UAE, Qatar and Australia.
Ritchie Bros Auctioneers (ME) is also planning to expand during 2009. The firm held its first unreserved auction in October 1997 and has conducted regular auctions every year since. It currently has 38 full-service auction facilities worldwide and is planning to add to these, plus increase the number of auctions it holds at the existing locations.
It is free to attend the firm’s auctions; however buyers registering for its Dubai auction, for example, must provide a deposit equivalent to 25% of their intended purchase price. UAE-based bidders must also provide a copy of their trade licence in advance, while overseas buyers must provide photo identification.
Anyone wishing to register as a bidder with Iron Planet must place a deposit of EUR2,000. In addition to making direct bids, buyers can register in advance the type of products that interest them and the firm’s Dublin-based staff will contact them about suitable products that are due to be included in upcoming auctions. Buyers can place bids during a preview period to counteract issues such as global time differences; these bids won’t show online until the auction day.
As an entirely web-based auction process, Iron Planet carries out an independent analysis of each item entered into auction and provides potential buyers with an “iron-clad assurance” of the item’s condition. With land-based auctions, equipment is sold as seen without warranty, making it vital for potential bidders to undertake a mechanical check if they want to ensure plant will meet their needs and provide value for money.