TRAILER DEMAND would experience an “explosion” if Congress raises the gross vehicle weight (GVW) limit on federal highways from 80,000 pounds to 97,000 pounds, Kenny Vieth said in his presentation, “US Trailer Demand Review”.
“If we change the specification of the trailer, watch out for the demand,” said Vieth, senior partner of A.C.T Research. “We're going to have a whole new set of trailers. People are not going to spend a lot of money on old trailers.”
He said it's not a question of if, but when.
“The infrastructure of this country is not of sufficient size to haul the growth of freight, whether we're talking rail or road, water or pipeline,” he said. “So each mode is going to have to improve its productivity. It's just not an option. So whether we like bigger trailers or heavier trailers behind the tractors, something's going to have to happen on the truck side.
“Rail has to grow. Road has to grow. Rivers have to become more efficient. Or we just will not maintain our infrastructure sufficient for economic growth. If this happens, we'll see an explosion of demand in the trailer side. You can say, ‘Well, people aren't going to want to buy it.’ Well, if one trucker buys it, the next trucker has to. We can look at past trailer law changes in terms of lengths and widths, and it's a question of, ‘If I didn't, somebody else did, and I lost business.’ ”
He said trucker profits matter because carrier net income and new US trailer orders have closely paralleled each other since 1995.
“Trucker profits are sagging, but shouldn't fall apart,” he said. “That's good. When people say that we have excess and truckers are losing pricing power, they're really not getting less for contracted freight. They're not getting the raises they were getting and keeping up with costs. They're narrowing their margins. So don't think trucking is falling apart.
“Secondly, when freight gets up, there isn't truly an excess of equipment. A year from now, if we pick up the economy, the headlines are going to be reading, DRIVER SHORTAGE. And when we move into growing freight again, the pendulum has partially shifted back to the trucker, because there is not an excess of drivers. By next year at this time, we could be talking about profits again moving off the 4% level.”
Freight volumes down
Vieth said there is “uninspired” trailer order activity because commodity-driven trailer prices in the late third quarter of 2006 hit just as freight volumes cratered.
“Softness in freight is partially driven by inventory correction that has gone on through first quarter of this year,” he said. “Truckers already swimming in too much excess Class 8 capacity decided not to add to their equipment predicament. The timing of downturn keeps cancellation rates in check. Backlogs were down 22% year-over-year in April. One of the things I have to give the industry credit for is they've adjusted build rates to this order flow so that the backlog has maintained some kind of resilience.
“We're not experiencing that peak this year in the first and fourth quarters. We're thinking that when you fill up the build spots later in the year by placing orders, that tends to help slow orders in the summer months. There is speculation that freight will move as we go through the year, that maybe in the summer months we'll see some orders we don't usually see.”
Builds were at 20,300 per month through the first quarter, compared to orders of 21,200.
“This tells me if we don't see an improvement in orders, the build rate is going to go down,” he said. “If we annualize this year, we'll be around 240,000 units. But we're assuming we'll have enough orders that will maintain the build someplace in the range of 900 to 1000 units a day.
“Industry metrics are not out of line, so demand recovery should follow improved economic activity. The average age is well-situated. The supply of late-model equipment is at low levels. Scrappage rates are heading higher because of what was sold in the volume years of the ‘90s. A Class 8 overbuy in 2009 could lead to softer trucker profits in 2010. If it affects profits, it will affect trailers.
“Longer term, economic cycles don't last forever. Our forecast is that an economic downturn is projected in 2011. If you look at the last 30 to 40 years, the line has not always sloped up.”
Economic resurgence
Veith said the economy is expected to rebound in the second half of this year, though he added that he's a “little concerned about the yield curve.”
“The timing of the recovery appears to be hinging on out-of-line gasoline prices,” he said. “Anybody who dreams of going back to the old fuel prices … world demand is not going to change. The world is changing, and we're no longer king of the hill.
“The economy generates the freight. If I look at the economy over the last 30 years, every now or then we'll have a year when the freight of the nation is negative. We had that in '81, '91, and 2001. The freight at the end of the year was lower than the year before. When the economy grows, freight grows. It will grow in different ways depending on what in the economy is growing.”
Vieth said that over the past 30 years, the trailer population has grown an average of 2.4% per year.
“At the same time, we also are scrapping some of the population,” he said. “When the average age goes down, that means you're selling a lot of trailers. We oversold. Scrappage accounts for 75% of new-trailer purchases. The US replacement is currently at 180,000 units per year.
“In 2007, we're going to have a demand for the scrappage of 180,000 units. Add another 20,000 for Canada. You look at the scrappage going out over the next few years and think back to '96, '97, and '98 — we had some pretty big trailer years. From a scrappage point of view, this is a bust.
“The population has gotten old. Keep in mind that we didn't build a lot of trailers in '01 and ‘02, even ‘03. The scrappage from older units is going up over the next few years. From an age point of view, the fleet has gotten old.”
Other issues
He said that while the economy determines how many trailers ultimately are needed, other factors play a large part in determining when trailers are purchased:
- Underlying population trends
“More trailers per tractor means fewer miles per year per trailer and longer asset life. The move from FRP to aluminum plate to laminated steel sidewalls and improved parts quality and longevity mean longer asset life. As you move through the years, the quality of components is better, so the quality of the trailer is better than it was five or 10 years ago. So that probably works against demand.”
- Components of Gross Domestic Product (GDP)
Personal consumption (up 3.9% in first quarter) indicators to watch: Real Disposable Personal Income (RDPI), energy prices, consumer sentiment, and wealth. Residential investment (down 17.2%) indicators to watch: new and used sales, stocks, starts, permits, and interest rates. Business investment (up 2%) indicators to watch: Institute of Supply Management Index (ISM), Industrial Production (IP), Durable Goods (DG) orders, Inventory to Sales ratio (IN/RS), corporate profits. Government spending (up 0.9%) indicators to watch: the budgeting process. Export (down 1.2%) indicators to watch: exchanges rates. Import (up 2.2%) indicators to watch: exchange rates and oil/commodity prices.
“There are some concerns here,” he said. “Right now, people are still spending. But there are some negatives. When it comes to personal consumption, the cost of gasoline is a concern. Every time you spend another penny on gasoline, that's less you can spend on other items.
“Housing is worth 5% of the economy. Building permits continue to go down. There is some real debate about the second half of the year. That's a negative that has helped to keep the economy on a softer basis. Government spending doesn't look like it will change much.
“Consumption is running at 3%. In consumer sentiment, the trend has been up. But if you look at this downturn, if we continue to have problems with fuel, it's going to affect consumption. With business investment, you can look at it positively or negatively. When business is borrowing money, it tends to be a reflection that things are going well. Whether they are using it to actually invest or buying other companies, this is a sign from my point of view that is not a negative. Corporate profits are phenomenal right now. That's a plus.
“Manufacturers' orders are a good sign looking forward. The purchasing managers' index turned up again and is going in the right direction. But any time we've had an inverted yield curve, we went into recession. There hasn't been an exception since the ‘70s. Maybe it's different this time.
“Oil prices and the housing impact are the biggest wild cards in an otherwise sanguine outlook.”