After a trip to the Renew Your Bod Spa where I got a facial and a body wrap and was massaged, peeled, waxed and polished, and a trip to my hairdresser, cosmetologist and manicurist, I feel like a new woman.
Much poorer but young again and, like Baby New Year, ready to face the challenges of 2004. But what lies ahead for the trucking and commercial tire industry?
Last year was not so great. However, at the end of 2003 there were clear indications that having faith and hope in 2004 may not be futile. Let me look into my crystal ball now that the hair is out of my eyes and see what secrets it reveals.
Economic renewal
Ah yes, I (as well as several noted economists) see the economy continuing to gain momentum in 2004. Trucking-always the first to see a decline in the economy and the last to see an increase-finally will benefit from the upswing. Extremely lean inventories, growth in orders for manufactured goods and increasing retail sales will keep trucks moving.
Low inflation, exceptionally low interest rates (not expected to increase until mid 2004), rising equity valuations and rising corporate profit expectations point to stronger economic growth in the new year.
However, the continued flight of manufacturing jobs overseas could hurt U.S. employment as well as the trucking industry since domestically produced goods require five to seven moves from raw material source to retailer, while items made overseas require only two U.S. moves-from port to warehouse and warehouse to retailer.
But as global growth returns, the weak dollar should put U.S. manufacturers in a strong position to boost exports, which also boosts employment and freight. Estimates for growth in the country's gross domestic product (GDP) range from 3.5-4.2 percent in 2004. (The typical GDP growth rate is about 3 percent.)
Trucking capacity
Trucking capacity will be a critical issue in 2004. The tightening supply of available trucks will benefit those carriers that have survived the rough past couple of years. Capacity may remain tight for a variety of reasons. Some carriers are still wary of the 2002 low-emission heavy-truck engines required by the Environmental Protection Agency (EPA) and are still putting off buying new trucks for as long as they can because they are concerned that performance, durability and fuel economy will deteriorate.
In 2004 finance and insurance issues likely will curb the usual flood of new entrants into trucking, even when more freight and higher profits make it tempting. Carriers themselves may try to keep a lid on capacity growth so they can raise rates and generate increased profits.
However, the demand for new trucks will see a tremendous upswing in the next two to three years as fleets ad-dress pent-up replacement needs following years of fleet aging.
The fleet of Class 8 trucks currently plying the highways is the oldest it has ever been coming out of any recession. The flood of Class 8 tractors purchased from 1997 to 1999 is now four to six years old. At some point aging equipment has to be replaced. That point is getting closer every minute.
In addition, the inventory of good low mileage, late model used trucks is just about gone so fleets now have little choice but to buy new. So it looks like 2004 and 2005 will be very strong years for truck sales. (To start things off Swift Transportation announced it will purchase more than 4,000 Volvo trucks over two years.)
The forecast for 2004: Class 8 truck sales up 30 percent to 171,000 units (vs. 141,000 in 2003) and 183,000 units in 2005.
There is also pent-up demand for new trailers, which was created by low 2001-2002 sales. The low price of trailers relative to other equipment is attractive, and the new hours-of-service rules coming in January could push truckload fleets to more drop-and-hook operations, which require more trailers to get around loading and unloading delays.
Trailer shipments for 2003 are projected at around 175,000 units vs. 138,000 in 2002. The forecast for 2004 is 215,000-225,000 units, up about 25 percent over 2003.
Increasing costs
Freight rates are going to increase in 2004 in the area of 2-3 percent not only due to the law of supply and demand forced by capacity issues, but many carriers will continue to walk away from unprofitable business.
Many fleets also are implementing a surcharge in the 2-percent range to offset insurance costs that have risen to almost 45 percent of total wage costs in recent years. Due to the productivity impacts of the new hours-of-service regulations, shippers will have to create more efficiency in their operations in order to get freight on trailers and moving as scheduled. Otherwise, they'll have to compensate the drivers and the trucking companies on an hourly detention basis.
Fuel prices remain the wild card for 2004. Most large for-hire carriers are much better at imposing fuel surcharges than they were a few years ago when a sharp upturn in diesel prices put thousands of trucking companies out of business. But high fuel prices still hurt owner-operators, small carriers and private carriers in competitive industries where it's difficult to raise prices.
Distillate inventories are at the low end of normal. If the winter is abnormally cold, higher diesel and heating oil prices will result. The Organization of Petroleum Exporting Countries (OPEC) may cut back production over concerns that a recovery in Iraq and higher output in non-member nations such as Russia will undermine prices in 2004. OPEC's desired price range of crude is $22-$28 a barrel. (In December, a barrel of crude oil was $29.)
Double-edged sword
Ironically, the improved economy also will have a negative impact on the trucking industry. Trucking endured a significant driver shortage before the economic slowdown and recession of recent years. Now that the economy is in the upswing, drivers will exit the industry for other types of work that may keep them closer to home, and the labor situation is expected to tighten further.
Add on the changes in driver work hours imposed by the federal government beginning in January-which are expected to require 84,000 more drivers to haul the same amount of freight-and you have fleets fighting for drivers. As a result, driver compensation will increase substantially in all segments of the industry.
Happy days ahead?
The presidential race in 2004 will be another major event to impact us. Howard Dean, former governor of Vermont, is an early favorite for the 2004 Democratic presidential nomination. (All of you Hillary Clinton fans will be disappointed to know that she has said she will not run this year for the Mr. First Lady spot.)
While there are signs of trouble for George W. Bush, he should be encouraged that his approval rating shot up to 63 percent from 54 percent right after Saddam Hussein was captured.
But in the end, the election will be determined largely by several factors: the nation's success or failure in Iraq; the war on terrorism; and how the economy performs through the second quarter of 2004.
In summary, truck carrier income increases experienced in 2003 came about as a result of cost cutting, fuel surcharges, tightening capacity and other factors. When the economy comes around in 2004, recoveries in trucker profitability will be even better, and happy days will be here again for the trucking industry.
Naturally with good times ahead for the trucking industry, the commercial truck tire market will see happier days, too. With more trucks hauling more freight there will be more tires wearing off tread rubber.
In 2003 it is estimated that 14.9 million new replacement truck tires were sold. This number should increase in 2004 by at least 2 percent to around 15.2 million units. With the boom in sales of new trucks and trailers, sales of tires for original equipment will increase dramatically.
Original equipment sales in 2003 were expected to be around 4.1 million units, but OE sales this year should increase around 10-15 percent to around 4.5 million to 4.7 million units.
This is good news for tire manufacturers but maybe not such good news for tire dealers.
This great increase in OE demand may make some manufacturers and models scarce in the replacement market if there is a shortage in production capacity. OE manufacturer orders are always filled before replacement tire orders.
Prices for medium-duty truck tires will go up Jan. 1 primarily due to increases in raw material prices, which are not expected to drop at all in 2004. All the major tire companies have raised prices on commercial truck tires 2-6 percent.
Tire companies in general will do well in 2004 as they ride the improving economic wave and if their price increases stick.
However, Goodyear remains a great concern. Its delay in filing its amended 2002 10-K with the Securities and Exchange Commission (SEC) until 2004 threatens its ability to quickly access cash to run operations effectively. This could seriously hamper its turnaround plan. However, I'm betting the company will get its bond offering and avoid a dire situation.
Industry-specific issues
The entire tire industry is affected by the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act and its interpretation by the National Highway Traffic Safety Administration. So far only the passenger and light truck segment has felt its effects.
However, attention is now being turned to commercial truck tires. A second round of performance testing will be completed and it is expected that performance requirements (FMVSS119 testing) for truck tires will be tightened. These same requirements will most likely extend to retreads. The final rule to upgrade requirements for new heavy truck tires and a decision on whether to develop a new standard for retreaded tires will only occur in 2005. The final rule for a new standard for retreaded tires will be made in 2006.
Work also will begin in 2004 on determining the requirements for tire pressure monitoring systems for commercial trucks. It is probable that these vehicles, as with passenger cars and light trucks, also will be required to have these systems.
Research and testing will be conducted in 2004 to help determine performance requirements for these systems. A decision on how NHTSA should proceed with heavy truck tire pressure monitoring systems will only be made in 2005.
The Tire Industry Association will continue to push to create a National Tire Safety, Research and Education Alliance that will coordinate a national checkoff program to support consumer education, industry training and research and development.
All legal considerations and objections will be eliminated, I believe, and progress will be made pushing the required legislation needed to create the alliance through Congress.
Further, great efforts will be made to explain this program to the tire industry thoroughly so that everyone is knowledgeable about it when they cast their vote in the industry referendum that actually will establish the alliance.
TIA will continue to work on developing programs and benefits that increase the value of TIA membership to everyone in the tire industry. As a result, TIA membership should grow substantially in 2004.
As you can see, 2004 should be a year of improving business conditions. You should be able to sell more tires, retreads and tire services as trucking activity increases. There are a lot of new opportunities and events that probably will be changing the way in which you do business, so stay young and flexible and ready to meet those challenges.
Do whatever you can to approach your business with a fresh face. However, I don't recommend getting it peeled, waxed and polished. As far as I'm concerned, they should do this only to fruit and cars!
Peggy can be reached via e-mail at [email protected]crain.com.