ROCHESTER HILLS, Mich. (Jan. 3, 2005) — 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.
Jockeying for position
Bridgestone/Firestone (BFS), Goodyear and Michelin North America Inc. will continue to battle for the top spot in market share in the truck tire segment.
National account programs and offerings of additional tire maintenance services will continue to be used to lure fleets to buy their products. While Bandag Inc. still will maintain the largest share of the retread market in 2005, Goodyear and Michelin will enjoy the largest growth in this area. Cooper Tire & Rubber Co.'s Oliver Rubber Co. subsidiary and Marangoni Tread North America Inc. also will pick away at Bandag's market share.
With a projected shortage of medium truck tires and with the current combination of still-low interest rates and tax breaks for the purchase of new equipment, retreaders are in a prime position to expand their businesses.
Now that BFS has introduced its Greatec wide-base tire to compete with Michelin's X-One, expect growth in wide-base tire sales since fleets have an additional source for them. However, in this era of massive equipment purchases, automated tire inflation systems and record fuel prices, if over-the-road fleets do not make their move to these tires soon, it is doubtful they ever will—and wide-base tires will remain a market niche product.
Tire prices should remain firm throughout the year. Many tire companies already have announced price increases that became effective in the beginning of the year. The cost of petrochemical-based raw materials like synthetic rubber and carbon black used in tires will remain high due to global oil demand, but hopefully may level off toward year-end.
MEPS International believes steel prices should decline through the first half of 2005, which would be welcome relief for steel radial tire manufacturers. This decline is tied directly to decreased demand for steel in China. As a result of these factors, we may see pressure easing on raw material costs as the year progresses.
The Chinese frontier
Tire companies' interest in China will continue to grow as will imports from that country. Why? Well, here are a few facts to consider:
* China is the largest truck and bus tire market in the world—even larger than the U.S. in new tire sales.
* Today in China, the truck tire market is 20 times larger than the car market.
* Last year, Chinese truck and bus operators purchased 30 million new tires (primarily bias).
* Of the 127 million truck and bus tires sold around the world, China consumes nearly 24 percent.
* While that country recently had no intercity roads like U.S. interstates, nearly 25,000 miles of divided highway should be ready between the 2008 Beijing Olympics and the 2010 Shanghai World's Expo.
Is it any wonder tire companies are establishing joint ventures with the Chinese to build tire plants for domestic as well export products? China needs hard currency to purchase products and raw materials from other countries. Therefore, it has to export products overseas to generate this currency. That's why exports are so vital to a country that is growing so fast.
Even though it could use all the tires it makes domestically, it must export to survive in the global economy. Expect Chinese imports to continue to grow in sales in the U.S. in 2005. Also expect them to improve in quality as companies like Michelin, Goodyear, Bridgestone Corp., and Cooper transplant Western technology to China.
The FET factor
The entire tire industry is affected by the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act and how the National Highway Traffic Safety Administration (NHTSA) interprets it. So far only the passenger and light truck tire segments have felt its effects.
However, the government has been working on addressing commercial truck tires. It is expected that performance requirements (FMVSS119 testing) for truck tires will be tightened. These same requirements most likely will 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 should be introduced this year. The final rule for a new standard for retreaded tires will be made in 2006.
Work also will continue this year on determining the requirements for tire pressure monitoring systems for commercial trucks. Research and testing will be conducted this spring to help determine performance requirements for these systems. A decision on how NHTSA should proceed with heavy truck tire pressure monitoring systems will be made in late 2005 or early 2006.
A new method of calculating federal excise tax (FET) on tires was included in the American Jobs Creation Act passed in October. Previously, the method for calculating FET on tires was based on the actual weight of the tire. For every 10 pounds of weight above 90 pounds, there was a charge of 50 cents, plus a flat fee of $10.50. Thus a tire weighing 118.63 pounds carried a tax liability of $24.81.
The new FET is based on the load-carrying capacity of the tire. For every 10-pound increment in load-carrying capacity above 3,500 pounds, a tax of 9.45 cents is levied. So, for a tire with a load carrying capacity of 6,175 pounds, a fleet would pay $25.27 in tax. Super single tires, however, are to be taxed at the same rate as bias ply tires, which is 4.725 cents for every 10-pound increment in load carrying capacity.
This gives super single tires a great advantage in the marketplace since taxes are cut in half and, since one tire replaces two, users of super singles will get a real deal in the tax department.
The trucking industry does not know what the actual impact on it will be at this time. However, the tire industry believes that the provision for super singles unfairly favors these tires in the marketplace and the tax cannot be revenue neutral. You may encounter some resistance or at least questions about this change in tax when you present your fleet accounts with their invoices in 2005. You also gained an added selling tool if you are pushing the new wide base tires.
The Tire Industry Association (TIA) will continue to push its efforts to create a National Tire Safety, Research and Education Alliance that will coordinate a national program to support consumer education, industry training and research and development. Commonly referred to as a “check-off” program, it has been renamed by the association. TIA will not refer to it as the Tire Initiative for Research, Education and Safety (TIRES) Program, as previously announced.
Association representatives will be meeting with dealer groups this year to explain how this program could work and get input from tire dealers as to how they would like to see the program structured. Legislation required to create the program would then be written, guided by the wishes of the industry.
In general, this is a great time to be in the commercial truck tire industry. Your fleet accounts have steadily rising revenues and profits and are in the best shape they've been in years. Trucks are racking up the miles like crazy and rubber is being worn off tires mile after mile.
2005 promises to be a strong year for commercial truck tire dealers—but that's not saying it won't be full of challenges. There are a lot of new opportunities and events that will probably be changing the way in which you do business. As you venture into the new year, remember another old Yogi Berra profundity: “The future isn't what it used to be.”