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Tier 4 regulations have created massive disruptions in equipment manufacturer's businesses. The changes required by these new regulations have resulted in billions of dollars and tens of thousands of man-hours having to have been invested in new research and development, not only in the engines but also in the equipment frames themselves in order to allow for the larger, heavier and more complex power plants and emissions components.

For the most part, however, it seems that this massive change has come about almost unnoticed by most contractors. While snippets of news may have found their way to them, for the most part the massive scale that Tier 4 has impacted the market has gone unnoticed, and its future impact unprepared for.

I certainly don't mean to come across as scolding. Most of the hard work, energy and money that have gone into the Tier 4 changes are practically invisible to the average contractor; invisible, of course, until the need for new equipment comes along. At that point, the 15% to 20% increase in retail pricing and the further investment in maintenance, training and upkeep are fully realized.

Ultra Low Sulphur Diesel and its Impact on Exports

Along with the emissions regulations, the US federal government mandated that oil refineries produce diesel fuel that had far less sulfur content than in the past. Bear in mind that this ULS diesel fuel is only available in "regulated" countries and some select urban markets in other areas. What this means is that developing countries such as those in South America do not have access to the fuel required for the new Tier 4 motors, and access to this fuel may be a long time coming. This is important to realize as these markets are massive export partners for used equipment.

Without access to the necessary fuel, sales of Tier 4 equipment into these high-demand areas will not be possible...

Without access to the necessary fuel, sales of Tier 4 equipment into these high-demand areas will not be possible without significant alteration to the emissions system, engine computer and filters.

Bear in mind that while it may be possible to scale a Tier 4 motor back to be able to operate with the lower quality fuels, performance will be significantly affected. Having the de-tiering done to the equipment would also need to be done at additional expense prior to export, adding to costs. Additionally, this Tier 4 equipment was initially sold at a much higher price point initially, meaning that its value as a percentage of new pricing will be significantly lower than earlier models of equipment.

Bear in mind that while it may be possible to scale a Tier 4 motor back to be able to operate with the lower quality fuels, performance will be significantly affected. Having the de-tiering done to the equipment would also need to be done at additional expense prior to export, adding to costs. Additionally, this Tier 4 equipment was initially sold at a much higher price point initially, meaning that its value as a percentage of new pricing will be significantly lower than earlier models of equipment.

Export Markets and Their Impact on Used Equipment Pricing

The US equipment market is highly dependent on a reliable outlet for used machines, primarily as a liquidation platform for new equipment trades. With major export markets taken out of the equation, it is highly likely that we will see several main areas impacted.

Firstly, demand for used Tier 4 equipment will be reduced. This will result in a surplus of used equipment in the domestic US marketplace.

Secondly, residual values for this equipment will drop. This will mean that borrowing costs for equipment leases, financing, and rental will increase. Collateral estimates for loans will decrease. Basically, getting funding for new equipment will become more difficult for people who are not cash buyers.

Used equipment supply will increase by 15% to 20% within North America, and also result in a drop in pricing to the tune of the same 15% to 20% margin.

Lastly, the triple threat of increased prices, higher complexity and reduced residual value may mean that the demand for new Tier 4 equipment will be impacted.

Putting Dollars to the Forecasting

A company by the name of Manfredi & Associates out of Mundelein, IL, recently conducted an in-depth study of the impact of emissions regulations on used equipment pricing called "Quarantined Markets".

In this study, the author predicts that used equipment supply will increase by 15% to 20% within North America, and also result in a drop in pricing to the tune of the same 15% to 20% margin.

Local Impact

What these changes in the used market will mean to local contractors can be guessed at fairly accurately.

With Tier 4 equipment offering substantially lower residuals and higher cost of ownership, Tier 3 equipment will rise in demand and pricing.

Rather than investing in newer equipment, many contractors will elect to continue to rebuild equipment in existing fleets much longer than in the past. More and more contractors will avoid the risk of lower residuals by renting and leasing more often, or else subcontracting the work to other companies.

A host of specialty companies will emerge that cater to this new market. They will specialize in "de-tiering" Tier 4 equipment for export. There will also be equipment re-sellers that specifically target later model, lower houred equipment and charge premium pricing for this high demand commodity.

Contractors that do elect to buy new Tier 4 units will demand higher performance to offset the higher costs. "Quarantined Markets" puts that demand at a 20% increase in performance over previous models before customers will be satisfied with the value of the new equipment purchase.

Summary

While the actual impact of Tier 4 regulations is yet to be seen, we can safely say that they will significantly impact both the new and used equipment marketplaces.

The technology advancements made to go along with the new emissions systems will offer better performance with a trade off in pricing and complexity. More so than anything else, the availability of fuel in markets outside North America will make itself felt. Just to what degree that happens is anyone's guess, but there are some good ones out already, and the outlook for used Tier 4 equipment pricing is not rosy.