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Commercial vehicle market ascending to a 2015 peak—but is it a level summit?

June 5, 2015
ACT Research analysts believe the commercial vehicle will peak this year. But don’t be surprised if this peak is more of a plateau.

THE commercial truck and trailer industry has come a long way since the depths of the Great Recession. After five consecutive years of growth, ACT Research is expecting the market to reach its peak in 2015. But the speakers at the company’s most recent seminar believe the market will remain strong for years to come.

For a day and a half, attendees at the 52nd ACT Research Seminar in Columbus, Indiana, heard the views of experts from a range of market segments: truck and trailer manufacturers, fleet customers, regulators, economists, and market analysts.

Here is a summary of what these speakers had to say:

US Economy: Slowing or just bad weather?

Sam Kahan, ACT Research

Sam Kahan, ACT Research

​Kahan contemplated the significance of the soft economic numbers at the start of 2015.

“One theory about slowdown in economic numbers is that it’s heavily related to the weather,” Kahan said. “First quarter 2014 preliminary numbers were negative, too, as much of the country dealt with severe winter weather. But for all of 2014, GDP grew by 2.4%. In many cases, these numbers should improve as we move through spring and into summer.”

He said the likelihood of a recession is very low “unless policymakers blow it.” He places the chance of a recession at 5%.

By the end of next year, inflation still won’t exceed 2.5%. Financial markets believe drop in energy prices will help keep inflation low, Kahan said.

•  Cheap oil will not last forever, however. Kahan believes the price of a barrel of oil will rise $20 this year, with another $10 price hike by the end of 2016.

•  Look for an estimated 3% growth in GDP this year.

•  Expect interest rates to rise. “The Fed may or may not raise rates,” Kahan said. “There is plenty of reason to raise rates, but the Fed wants to be the white night to come to the rescue. We think rates will be around 1% by the end of the year.

•  Expect growth in both residential and commercial construction. Housing went from 6% of GDP to about 3%. Kahan sees a shift from a hot multi-family market to single family this year.

•  A major negative—imports will increase due to weakness in rest of world and the strength of the US dollar.

•  The trade deficit should rise from 3% of GDP to 3.5%.

•  Unemployment—couple of trouble pockets. With many people underemployed, this argues for further economic stimulation.

•  Kahan downplayed the adverse effects of the downturn in oil and gas drilling, at least for the economy in general.

•  Interest rates, prices for materials, and labor costs should remain fairly stable this year.

US trailer market overview

Frank Maly, ACT Research

Frank Maly, ACT Research

Trailer manufacturers should ship approximately 303,000 trailers this year, Maly said. The projected 12% increase over 2014 shipments comes on the heels of a 15% year-over-year surge last year.

Trailer market factors continue positive. Recognizing the possibility that extended backlogs could lead to increased cancellations, Maly nevertheless believes that after trailer shipments peak this year, they will continue at historically high levels all the way out to 2020.

 “We are in a comfortable place right now,” he said. “Much more of an increase will result in inefficiencies.”

The five-year outlook calls for a record year in 2015, followed by a mild decline in US trailer shipments in the years to come. ACT Research expects a 3% decline overall next year in total trailer shipments. The forecast calls for a 9% decline in reefers, a 2% slip in dry-freight vans, but a 3% increase in flatbed trailers. All other trailer types will decline by 4%.

Trailer market factors continue positive, however, even after five straight years of growth.

•  Fleet age has improved, but plenty of old trailers are driving the average age of trailers above historical averages. Old equipment impacts customer service and productivity

•  Pent-up demand remains following the aftermath of the Great Recession.

• Improved economy and increasing freight volumes are fueling demand for trailers.

•  Improved fleet profitability and attitudes are making fleets able and willing to buy.

•  “Low hanging” productivity gains have been harvested, making it more difficult for trailer manufacturers to readily increase capacity.

The picture, however, is not entirely positive. Among the negatives that Maly believes are affecting or will affect trailer manufacturers include:

•  A drop in the energy sector. The rig count is down, which adversely affects freight. The energy sector has driven much of the demand for trailers.

Trailer market update:

•  Customers placed a flurry of orders at the end of 2014, setting the stage for a very strong year in 2015.

•  Orders have remained firm. Cancellations have been low for every category of trailer, Maly said.

•  As a result of the strong demand, component supplies have been a bit of a challenge.

North American Class 8 Market Analysis and Forecast Overview

Kenny Vieth ACT Research

Kenny Vieth, ACT Research

Favorable business conditions remain through 2016 and beyond, Kenny Vieth said. The nation still has and old fleet and high-value new equipment.

“We have to feel good about where we are,” Vieth said. “And if we continue to have slow growth in the economy, the strong demand for Class 8 trucks could last even longer.”

Summarizing the reasons for his optimism, Vieth offered the following:

•  2015 is shaping up to be another good year for freight and fleet profits.

•  Better economic growth is occurring in sectors of the economy that are key sources for freight.

•  Freight rates are rising, and capacity remains tight. Fleet utilization is near 92.5%, indicating exceptionally tight capacity.

•  Lower energy prices are likely to persist. This is particularly helpful, because every penny in fuel savings is worth $2 billion nationwide.

•  Favorable business conditions are expected to last into 2016 and beyond.

•  Old fleet, with their maintenance and downtime issues, help create demand for new equipment.

•  Used equipment values remain high, lowering the price fleets must pay for new trucks.

•  Fleets are making money.

“Truckers use trucks to haul freight, but they buy trucks to make money,” Vieth said. “If they are not making money, they aren’t going to buy. We expect a 3% increase in size of the fleet.”

Few build slots for Class 8 trucks remained for 2015.

“By the end of May, only 20,000 open build slots will be left,” Vieth said. “There will be zero in August.”

No regulations are on the horizon that will adversely affect truck sales. Phase 1 of the EPA and NHTSA joint regulation of heavy-truck greenhouse gas emissions, Vieth added, is actually spurring truck sales. Swift Transportation, for example, is lowering its trade cycle from four years to three.

“The average age of a Class 8 truck was 8.7 years in 2006,” Vieth said. It’s now 10 years. The reason—cost of vehicles. Fleets trade old trucks because of their higher operational costs. The case for new trucks is getting stronger. Fuel economy savings alone will pay for a major part of the monthly payment. Yet truck OEMs did not appreciably raise prices to reflect the value of fuel savings.”

Like trailers, Class 8 trucks should peak this year. ACT is forecasting sales of 340,000 this year, edging down to 313,000 next year, and falling to 265,000 in 217,000.

Medium-duty truck outlook

Steve Tam, ACT Research

Steve Tam, ACT Research

Steve Tam summarized the medium-duty market this way:

•  Cancellations and key ratios (BL/BU and IN/RS) suggest fundamentals are in line. Sales, however, are well within the truck OEMs’ capacity. Plants could use more orders.

•  Housing will make gradual contributions to the economy and demand for medium-duty trucks.

•  State/local government will increase purchases in 2015.

•  Forecast for medium duty sales is below replacement until the first half of 2016.

•  Velocity of growth for medium duty market is

determined by the pace of economic growth in general and consumer spending in particular.

Tam expects sale of approximately 160,000 trucks for Class 6 and 7, along with about 70,000 Class 4 and 5.

Greeenhouse gas emissions update

Bill Chamley, EPA

Bill Chamley, Environmental Protection Agency

World-wide, heavy-duty vehicle energy demand estimated is expected to grow by 65% over next 30 years, and heavy-duty vehicles are projected to be largest transportation sub-sector use of energy by 2040, EPA’s Bill Chamley said in presenting the case for Phase 2 of EPA and NHTSA’s joint effort to regulate greenhouse gas emissions of heavy-duty vehicles.

Phase 1 was implemented last year without any apparent adverse impact on vehicle sales, he said.

Phase 2 will be more expansive. These regulations, which Chamley said are expected to be announce before the end of June, may include:

•  Looking beyond off-the-shelf technology

•  Standards for new on-highway trailers

•  Additional and new technologies beyond Phase 1

•  Refined test procedures and updates to the vehicle simulation compliance model—a full vehicle modeling approach.

•  A small business panel process designed to develop solutions for directly regulated small businesses.

•  Updated technology, economic and environmental assessments.

The regulation, he said, is certain to apply standards to trailers in Phase 2. Regulators are trying to get test procedures as close to “real world” as possible.

What to expect from Washington

Ann Wilson,

Motor Equipment Manufacturers Association

Ann Wilson, Motor Equipment Manufacturers Association

In the aftermath of last year’s election Congress has a new look--including 58 new representatives and 13 new Senators.

“This is an opportunity for you to work with them and get to know them,” Wilson advised. “If you don’t take the long view, other industries will. Pay attention to the regulatory process. If you wait for the comment period, you are showing up late to the game.”

Key legislation that could impact the truck and trailer industry include:

•  Highway funding. “Highway bills used to be popular,” Wilson said. “Now we will run out of highway money in May. The question is how to get the money.”

•  Trade. MEMA supports Trade Promotion Authority, Trans-Pacific Partnership.

•  Advanced safety devices. MEMA is promoting the use of these devices. The association met recently with new NHTSA Administrator Mark Rosekind. “This is a great time to get to know NHTSA personnel. But come to them with data. They are under pressure and need data.”

•          Greenhouse gas, Phase 2. MEMA has a work group in place to address heavy-duty emissions. The group is attempting to put forth the best comments possible that represent the views of the entire supplier network, Wilson said. ♦

About the Author

Bruce Sauer | Editor

Bruce Sauer has been writing about the truck trailer, truck body and truck equipment industries since joining Trailer/Body Builders as an associate editor in 1974. During his career at Trailer/Body Builders, he has served as the magazine's managing editor and executive editor before being named editor of the magazine in 1999. He holds a Bachelor of Journalism degree from the University of Texas at Austin.