Contractors choose the rental option when it comes to plant

The decision to buy or rent plant equipment will come down to the requirements of each project. Each option brings its own individual merits. But as Zoe Naylor discovers, a growing number of contractors across the Middle East are heading down the rental path. It means that they do not have to finance idle plant, and still have access to the latest equipment for their projects as and when needed.

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By  Zoe Naylor Published  October 8, 2005

|~|90prod200.gif|~||~|If the current corporate trend is to move assets off the balance sheet, then the plant industry is no exception. More and more contractors throughout the Middle East are electing to hire in plant as an alternative to buying. Purchasing shiny new plant equipment is an unrealistic option for many construction businesses. It represents a big investment item on the balance sheet, and major financing costs on the profit and loss account. Alternatives include buying from the thriving used-plant market or renting plant on a job-by-job basis. The major advantage with renting is contractors don’t have to finance idle plant (which is always depreciating), plus they have access to the latest equipment as and when needed. “We’ve seen a big change in the industry — in the past, a lot of end-users would buy their equipment but a lot of companies are now choosing to rent it,” says Stephen Branch, general manager at Ritchie Bros Auctioneers, Middle East. “They’ll just use a rental service or a client hire service for their equipment needs rather than doing the capital exposure themselves.” One example of where kit is being hired for a local project instead of purchased is on Dubai’s Creek extension. There, a massive fleet of construction plant and equipment is currently being used to move around 6 million m3 of earth. “We’re hiring most of the trucks needed for the earthmoving on the project — it’s not worth buying this equipment since the job is too short and there is a large plant market here, so there’s plenty around,” says Ivan Warnes, commercial manager at Dutco Balfour Beatty Group. There are many reasons for the growth in the rental market; one reason is it is harder to achieve the margins for used equipment that existed years ago due to the hefty demand for machinery. “The North American markets and the Australian markets for example are very strong, so it draws a lot of the used equipment into those areas and makes it harder to get the good used equipment,” explains Branch. Business in the region is good, he says, and has certainly been in an up-mode over the last few years. “I think with the used equipment industry there is a lot of different market factors at work so it’s difficult to predict what will happen here over the next five years, for example. It’s hard to see beyond two years because numerous factors can change the demand for equipment, such as oil prices and currency exchange.” He adds that the decision to buy or rent kit will come down to the requirements of individual projects: “Every plant manager has their own philosophy on how to operate — for us we believe once you’ve outlayed your equipment you should sell it on. That way you’re turning over your capital and you have control over it. With rental you’re paying higher prices and higher premiums, but it often comes down to a question of cash flow. “Rental can work very well, but it’s not for everybody. If you have a five-year project it doesn’t necessarily make sense to rent, whereas with shorter terms projects it might be a better option,” adds Branch. Renting can also place considerable demands on work scheduling to ensure that the right plant is available at the right time. In terms of what kit is currently in demand here, the answer seems to be pretty much everything: “I think one of the changes that has occurred is that excavators are probably more in demand than they were five yeas ago, but this region is really into basic construction materials. There’s not a lot of overly specialised equipment here; it’s quite generalised and that demand has been steady and is still there.” He adds that fluctuations in currency have affected the market in terms of sourcing equipment from Europe, and most of the equipment is now coming locally or out of Asia. Arif Chishti, divisional manager UAE (Construction Equipment Division), Al Futtaim Auto & Machinery (Famco), says both buying and renting options work well here and the decision will depend on the type of project and the individual contractor. Both practices, he says, are common in the Gulf region: “Specialised contractors may buy equipment that falls within their areas of expertise and would want to rent the rest,” he explains. “By and large, for short term projects which require additional equipment, the rental option is beneficial. New entrants may also find renting a good option to start with,” he adds. But for long term and more complex projects, Chishti says buying is the primary choice. “Such projects require that the management of the equipment lies with the contractor. Contractors who have decided to buy but have capital constraints can exercise the option of rent with ultimate transfer of ownership,” he adds. Famco is the sole distributor for Volvo construction equipment in the UAE. Chishti says all the equipment produced by Volvo is popular, from wheel loaders and articulated haulers through to excavators, backhoe loaders and motor graders. “This year we have seen a change in trend towards the larger equipment and this is primarily due to the magnitude of the projects within the UAE and elsewhere in the region. Our order intake has been quite diverse and covers a large number of customers across all segments.” he says. Famco is currently providing a large amount of kit to mega projects in Dubai such as Dubai Festival City and the Palm Jebel Ali. Chishti says for the time being he sees continuous growth within the region’s plant sector: “The market for construction equipment will always be there, of course there could be a shift towards smaller equipment i.e. for maintenance of existing infrastructure and completed projects.” Equipment manufacturers invest vast sums of money each year in improving their plant equipment, concentrating on greater productivity (i.e. loads shifted per unit of fuel and time), which is often achieved through improved fuel consumption. Newer machinery can actually end up costing less to run, another reason why so many contractors worldwide choose to rent their plant equipment. “The way to get the good equipment is to rent,” says Branch. “It’s a natural phenomenon across the industry — it happened in the US and in Canada years ago, and it’s just starting to happen here in a large way.”||**||

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