THE TRUCK and truck equipment markets will experience a solid year of growth in 2005, but at a lower rate than in 2004, according to NTEA market data and research director Steve Latin-Kasper.
Latin-Kasper, delivering his annual “Truck Equipment Market Outlook and Industry Forecast” at The Work Truck Show in Indianapolis, said 2002 was the last down year in a series of three down years, with truck equipment shipments falling 6.1% and commercial truck shipments falling 1.2%. The next year provided a modest transition to 2004, when truck equipment shipments were up 25% to $33.9 billion and commercial truck shipments were up 11.3% to $64.7 billion.
“Starting off in 2005, we're still looking very good,” he said. “First-quarter data is not in yet, but the first couple of months of truck sales reported by Ward's Communications were looking good. We're seeing some interesting things happen in different segments. In the first three-quarters of 2003, Class 3 sales were kind of slow. Then in the first quarter of 2004 and the first months of 2005, Class 3 sales took off.”
He said the medium-duty segment, after three years of recession, didn't get to real growth until the middle of 2003, but is now experiencing a 40% growth rate.
Latin-Kasper said that while medium truck sales were almost identical to medium truck production by the end of 2003, production was outpacing sales by about 30% by the end of 2004.
“That shows that inventories were being created, and it had been a long time since that had happened,” he said. “And in an economic expansion, creating inventories is a good thing, because you don't want your lead times to get away from you. That's a good sign that production was getting out ahead of sales, anticipating further increases in sales. There was a huge increase in medium-duty sales in January and February of this year. A lot of that gap between production and sales will be closing pretty quickly. There still will be inventories out there, but they will dwindle rapidly.”
Because of the pre-buy in 2002, the heavy-duty segment experienced the recession earlier, but now was growing at a rate of over 40%.
Production was outpacing sales by almost 60% at the beginning of 2003, but as 2005 began, it was exceeding sales by only 1-2%.
“So there isn't a whole lot of heavy-duty chassis inventory out there — certainly not more than could be handled,” he said. “If anything, they could probably stand to pick up the pace of production a bit more. Trucks are being produced at a high rate and also being sold at a high rate, and inventories aren't getting out of hand.”
Trailer production, after peaking late in 2003 with a 40% increase, fell off in the first half of 2004, but has started to pick up.
“In terms of its cycle, it looks a lot like medium duty,” Latin-Kasper said. “It took a lot longer to turn up and get production moving in the right direction.”
Public construction to increase
Latin-Kasper said business truck production, which at the beginning of 2002 lagged almost 20% behind private construction spending and 30% behind state construction spending, was at the beginning of this year outpacing private by 6% and states by 14%.
“We're seeing a slippage in actual housing starts that is being more than made up for by other types of private-section construction — plants being built, utilities, office space,” he said. “We can look forward to public construction — which had flattened out — to start going up in the next few quarters as tax revenues start increasing at the state and municipal levels of government. We've had a bad three years in selling to state and municipal governments. But they're going to be one of the bright spots for the rest of 2005 and through 2006 and probably well into 2007.”
He said that compared to the truck industry, state and local government spending is stable.
“We're volatile — very high highs and very low lows,” he said. “Government is very stable, which is why people in that market really like it. It's a nice, dependable market. Even in the years where they aren't increasing sales, they're still maintaining expenditures on trucks and truck equipment. So even in these last three years of recession prior to 2004, government sales were looking good. It will become a source of growth in the next few years, not something holding the industry back.”
He was just as optimistic about electric utility production, which did not grow at all throughout 2004. He said it had nothing to do with economics; there were still some rather large political battles being fought in the wake of last year's brownout.
“It seems that as a nation, we haven't yet made up our minds how we're actually going to go about fixing the problem of having too many people on the existing grid,” he said. “That problem will be solved — and it'll be solved by more utility construction. If you look at any of the things that are published by the gas or electrical industries, they expect massive construction, not just for the next couple of years, but for the next 10-15 years. Most of us had expected there would be bigger and better sales increases to utilities in the past year. That hasn't happened yet, but it's going to.”
Latin-Kasper said the Producer Price Index showed that the rate of increase for the last quarter of 2004 declined dramatically across the board for carbon steel scrap (6%, compared to 53.2% for the year), hot rolled sheet and strip (6.5%, 28.8%), hot rolled bars, plates and shapes (2.6%, 53.1%), and steel pipe and tubes (3.1%, 66%).
“That's the good news,” he said. “The bad news is that we're hearing some more rumbles that the second quarter doesn't look good for steel prices. We have no really good way to confirm that. It may or may not happen. I'm not as inclined to worry about it as I was in January.
“What drove steel prices up in 2000 was the Bush Administration's decision to raise tariffs for imported steel in the US. Most of the tariffs were removed two years after that — just in time for the economies of China and India, which were growing very rapidly, to cause even more trouble in the steel industry than tariffs. There was very little carbon steel scrap to be found on Planet Earth toward the end of 2003 because the Chinese and Indians were buying everything they could — and that drove steel prices sky high.
“Over the course of 2004, prices peaked, then stabilized toward the end of the year. There's a little bit of concern that demand is going to take off again in China. But as it turns out, the latest reports are that the China government is doing everything it can to dampen demand. They're also opening new coal mines and probably are going to try to produce more of their own steel.”
What's ‘normal’?
He said the capacity in the steel industry is going to increase. When? He said nobody knows. But the dramatic increases in price — 50% to 100% from one quarter to the next — will not materialize.
“Now, that may not get us back to a situation where steel prices fall down to a more normal level,” he said. “but I'm not sure that ‘normal’ can be defined anymore as what happened prior to the year 2000. ‘Normal’ in the steel industry in terms of prices is going to be fairly similar to what most of us have come to accept now as ‘normal’ in the gasoline industry. The new ‘normal’ for gasoline in the US is about $2 a gallon. The new ‘normal’ for steel prices is going to be something substantially higher from here on out than it was in 2000.”
Latin-Kasper said that Canada remains a very strong importer of American trucks, buses, bodies, and other truck equipment, accounting for $9 billion of America's $12.5 billion in exports in 2004. He said that will continue because the Canadian and American transportation sectors are well integrated. Mexico remained second with $1.2 billion.
However, the rapidly emerging outlets are Brazil (176.1% increase since 1999), China (172.9%), and Russia (136.7%).
“Many of you are probably wondering, ‘Well, how do I sell outside of the US, and if I do, who I should be aiming at?’” he said. “Those three are very big countries, and they are high-growth markets for truck equipment. They like US product and have the same transportation model in terms of road size, so trucks built here fit their roads nicely. If a truck is going, the truck equipment might as well be going with it.”
Latin-Kasper's forecasted pros for 2005: moderate interest rate increases, moderate inflation, low unemployment, increased capital expenditures, increased trade (especially exports now that the dollar is weaker against other major currencies), and increased state and local government spending.
On increased state and local government spending: “Keep in mind that as we move out of the current expansion and into the next recession — whenever that occurs, 2006 or 2007 — then the state and local government spending will continue to buoy up part of the industry. Whenever the recession starts, the tax revenues that they are putting into their next year's budget will be based on the previous year's sales from all companies and individuals they're collecting taxes from. So they will carry through with their spending plans after the recession starts, and they'll help everybody get through the first year of the next recession.”
His forecasted cons: terrorism/confidence and federal budget deficit.
On terrorism/confidence: “That's one of those things you don't know about. It's just going to stay in the background as a problem for a long time to come.”
On the federal budget deficit: “Why, with moderate inflation and low unemployment, is the Federal Reserve continuing to indicate that they expect to raise rates through 2005 and into 2006? They're normally worried about inflation when they're raising rates. They're not worried about inflation now. For the last four years, we've been establishing one new record deficit after another that will catch up with an economy after awhile. You can't expect to continue to have moderate inflation when you have a massive federal deficit. And rather than try to correct for what can be obviously predicted, the Federal Reserve is going to do moderate rate increases now because they know that's going to cause a large problem later, and they won't be able to fix it all at once. That's why we can fully expect the Federal Reserve to continue its six-month-long policy of moderate rate increases.”
International unveils mobile power option
INTERNATIONAL Truck and Engine has a solution for customers who require a reliable power source on the job site — and it's built right into the truck. The Diamond Logic PowerPack3, introduced at The Work Truck Show in Indianapolis, is a 3000-watt AC power system that is factory-installed option on its medium-duty and severe-service vehicles.
“Diamond Logic PowerPack 3 provides heavy-duty mobile power that virtually eliminates the potential for theft as well as the hassle and high costs of maintaining a gas-powered generator,” said Brad Bishop, International's Business Line manager, Truck Electronics.
The power system costs approximately $1 per kW and reduces wear on the truck by extending the life of its battery, alternator and starter, the OEM said. It is mounted on the truck body to save cargo space and can be used for anything from power tools, lights, test equipment and compressors, to onboard driver amenities such as TVs and refrigerators.