Well, here it is, the start of a brand new year. The good thing this year is that the trucking and tire industries are leaving a strong year behind and are starting out 2005 in pretty good shape.
The future? I am reminded of the old Spanish proverb, ``He who does not look ahead remains behind.'' So maybe I should look into my crystal ball and see what's in store for us in 2005.
Another big trucking year
Ah, yes, I (as well as most economic experts) see the growth of the economy slowing a bit in 2005. Record oil prices will have a direct effect on the economy as it returns to a more normal growth rate of between 3.2 and 3.6 percent-still a very healthy rate of growth-down from the amazing 4.4 percent rate seen in 2004.
Consumer spending should grow 3 percent in 2005. Freight tonnage growth is expected to slow some in 2005 to around 5 percent, down from the record 7 percent of 2004. This lower pace should still provide ample truck freight for everyone. All the experts agree that 2005 still will be another big year for trucking, which could push capacity expansion demands and push up truck and tire sales.
One of the reasons for this is that manufacturers, trucking's largest customer, have the potential to see a growth rate in the neighborhood of 5 percent in 2005 and will continue to see an increase in new orders to replenish lean inventories. Many people believe that U.S. manufacturing is dead as they hear that plants are going overseas to places like China and India. Certainly this is happening, but that doesn't mean all U.S. production will cease.
Believe it or not, U.S. manufacturers are exporting more than $50 billion worth of goods each month, and this equates to a lot of freight being trucked to ports.
The main reason why tonnage growth will slow is the tight capacity situation in the trucking industry. Expect continued tightening in the foreseeable future. High barriers to enter the industry-such as high fuel prices and liability insurance premiums-will continue in 2005. The shortage of drivers will be the biggest factor constraining industry capacity.
Most financial experts say interest rates will continue to trend upward through 2005, but they also remind us that they're coming from an all-time low. While that means higher finance costs for equipment buyers, the higher rates will attract more lenders, which means financing will be a bit easier to get this year.
Fuel is the biggest troubling issue for the trucking industry going forward. Significant relief is not coming in the near term. According to a Department of Energy monthly report, West Texas Intermediate crude oil, the U.S. benchmark, will average above $40 a barrel until the second quarter of 2005. Global oil demand growth is expected to slow to 2 million barrels per day (2.5 percent growth) in 2005 as global economic growth slows to more sustainable rates and as Chinese oil demand growth moderates from its 2004 rate.
Global oil inventories are expected to remain relatively low compared with historical standards. These lower inventories will work to ensure that oil prices remain in the mid $40 range through 2005. It is expected that the annual average price in 2005 will exceed the 2004 average price level and that prices will then decline slowly over the next few years.
Truck tire shortage?
Class 8 truck sales could increase from 270,000 to 280,000 units in 2005 due to a good economy and fleet growth. Some economists are even forecasting between 300,000 and 310,000 units by year-end. Trailer makers likely will produce around 280,000 trailers in 2005. This increased production demand may put a strain on vehicle makers' production capacity.
While this sounds good for original equipment manufacturers, don't forget that their tire orders get filled before yours, so expect some truck tire makes and models to be in short supply again in 2005. Adjust your order placement processes accordingly to alleviate your back order situation if possible.
The downside of this phenomenal demand for new equipment is that the truck makers' inability to keep pace with Class 8 demand could lead to soaring equipment prices. That could prompt some motor carriers to lock in deals now to guarantee price and delivery and to plan future purchases sooner than they normally would. It is expected that when fleets traditionally order trucks in September and October this year, they will find that equipment prices could rise 5 to 10 percent for the 2006 model year.
In the truckload sector, freight rates increased an average of 6 percent in 2004, and less-than load (LTL) rates increased between 3 and 6 percent. It is expected that truckload carriers will increase freight rates another 7 percent in 2005 and LTL rates will increase as well. These hikes, along with surcharges for fuel and insurance and ample freight to haul with limited capacity will continue to help fleets' profitability this year.
As a result, if you are looking for some good stocks to buy in 2005, look to the trucking industry.
In 2004 trucking stocks as a group more than tripled the gains of the overall stock market. Trucking stocks gained nearly 25 percent compared with an 8-percent rise for the Dow Jones Industrial Average in 2004, which reflected the firms' ability to stay consistently ahead of profit expectations by increasing freight rates and limiting capacity as freight volumes surged.
The commercial truck tire business will have a great year as demand for OE and replacement truck tires remains strong. Expect original equipment sales to increase by around 500,000 tires. This would be a 9 -to 10-percent increase over 2004. Replacement sales of medium truck tires should increase 2.5 to nearly 3 percent in 2005 from the 16 million units sold in 2004.
Retreaders also should have a good year. Two percent growth in this segment of the market will result in more than 17 million units being retreaded in 2005.