Strong Economy

WITH THE US economy chugging along, tank truck carriers are as busy as ever. In fact, the US economy is projected to grow by around three percent through 2006, and the expansion should continue into 2007.

Tank truck freight has fared better than overall truckload cargoes, and that trend should continue. Changes in the petroleum sector are leading to increased demand for tank truck drivers and equipment. Construction demand will stay strong. Plastics and industrial dry chemical shipments should increase by about five percent. Foodgrade shipments should grow by around two percent.

These were some of the conclusions drawn by Martin Labbe, Martin Labbe Associates, during his annual report on the economic outlook for the tank truck industry. He spoke during the National Tank Truck Carriers 58th annual conference May 7-9 in San Antonio, Texas.

“The US economy is a juggernaut right now,” he said. “We have what is perhaps the strongest economy in the world. There is no recession in sight for at least 24 months.”

Worrisome signs

Looking at the overall economy, he pointed out a few worrisome signs. Consumer debt could get a wake-up call this year. The labor market is improving, but wage increases need to exceed inflation. Consumers are trying to adjust to rapidly increasing fuel prices.

“We can expect $3.50 gasoline before the end of the year,” Labbe said. “Around 30% of households won't be able to handle the additional cost. Strong consumer demand for gasoline is driving prices higher. The fault does not lie with the oil companies.”

Challenges aside, business profits in general have improved dramatically in the past few months. Business investment demand will help sustain growth. Consumer sentiment is strong. The housing market continues to beat expectations, and the labor market is heating up.

“Through the summer, we believe unemployment rates will continue to fall slowly,” he said. “Consumer confidence will stabilize and will show some slight improvement. Consumer spending will be boosted by tax returns, and business investment will continue to improve.”

Bulk sector

Turning to areas of the US economy that have a direct impact on tank truck carriers, Labbe said that petroleum production will increase as new capacity comes on line. Ethanol, which is being used as a replacement for MTBE in gasoline, will require more tank trailers. Dedicated equipment will be required — at least initially — for ultra low sulfur diesel shipments.

Chemical production is surging due to all-time-high housing starts, low inventories, and resurgent manufacturing activity. Growth in chemical production should continue through the summer.

Labbe said he anticipates a drop in chemical production levels by fall as residential construction slows. Still, chemical shipments will end the year at above-average levels.

One factor that will benefit tank truck carriers on the chemical side is a shortage of rail capacity. “The railroads can't handle the increased chemical production because they don't have enough locomotives,” Labbe said. “In fact, it will be three to four years before locomotive capacity increases significantly.”

While tank fleets will stay busy, managers will face challenges on several fronts. Fuel prices remain at record highs, and insurance premiums are rising. Tractors and tank trailers are more expensive, and prices are “headed north,” according to Labbe.

“We still don't know for sure how the 2007 engines will perform, but we know they are more complex and less efficient,” he said. “Fuel economy is projected to fall with these new engines and ULSD. The engines may require more maintenance, and repair costs are certain to be higher.”

Diesel prices

Diesel prices could become an issue as ULSD begins to reach truck fleets during the last half of 2006. “We anticipate ULSD prices of $3.10 to $3.20 a gallon, but all bets are off if distribution issues arise,” Labbe said. “Fleets may find that older storage tanks at terminals take longer to switch over to ULSD.”

Driver shortages remain a long-term concern for the entire trucking industry. The current shortage is estimated at 80,000 drivers and growing. With unemployment nearing 4.5%, there aren't a lot of people available to be hired as drivers. Factors contributing to the shortage include demographic changes in the traditional source of drivers, wage levels, competing sources of employment, and quality-of-life issues.

“We see fewer fleets with drivers who have the same surname, a clear indication that the children of veteran drivers are choosing other career options,” Labbe said. “The military is becoming a source of new drivers, but it's too little, too late. The foreign labor pool is a problem for tank fleets and other transporters of hazardous materials due to homeland security issues.”

Traffic gridlock and distribution bottlenecks are additional challenges facing the tank truck industry. “These issues may be the greatest uncontrollable cost factors facing this industry,” Labbe said. “Tank fleets have limited options to address the issues. Rerouting of liquid and dry bulk commodities may not be possible. Bottlenecks may mean drivers and vehicles spend more time at terminals and delivery locations.

“Fleets need to do everything they can to minimize the impact on drivers. It's also important to make sure your customers understand that disrupted deliveries are a possibility with the distribution and traffic problems.”

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