It's hard to believe that we are now in the middle of 2013—why, it seems like only a few weeks ago that I took down the Christmas lights and wreaths. Valentine's Day, St. Patrick's Day and Easter seem like a blur. And now Halloween, Thanksgiving and Christmas don't look that far away again.
Apparently time really does fly when you are having fun! While I hope you're having fun, fun is not what the trucking industry would call it. That's because things related to trucking continue to be a struggle. Uncertainty would be a good word to describe the state of that industry at the moment. It seems that every measure of the economy is contradicting some other one.
Many statistics are moving from bad to good to just OK and then back to not so good. With these ups and downs in various economic signals, it's really hard to say anything more than that the economy remains "flattish." One of the causes of this situation is that consumer confidence has been challenged several times this year...by the fiscal cliff, the payroll tax hike and, more recently, the sequester.
Although it improved in April and jumped again in May, who knows if this positive collective frame of mind will continue. In March the U.S. Department of Commerce reported that orders for durable goods nosedived some 5.7 percent—which was rather strange since manufacturing had been the sector propping up the economy up until then. On the positive side, housing starts crossed the 1 million level in April for the first time since mid-2008. In addition home prices increased 9.3 percent for the 20-City composites in the 12 months ending in February this year.
This growth drives a lot of freight such as furniture, appliances and home improvement products. But unemployment continues to be a drag. The economy needs to create 225,000 jobs a month to help reduce the unemployment rate. Although 319,000 jobs were created in February, the numbers for January, March and April came in far below the figure needed to impact the unemployment rate, so it continues to hover at 7.5 percent.
According to a survey of business executives, government budget challenges (69 percent), rising health care costs (60 percent) and high tax rates (53 percent) are the greatest obstacles to U.S. economic growth—with all three perceived to be more significant this year than in 2012. As a result of this uncertainty, 43 percent of these executives are deferring major investments (including hiring) due to the "uncertain business climate."
On the good news side, automobile, SUV and light truck sales are returning to levels not seen since 2008 more than 15 million annually. The Detroit 3 auto makers have announced that due to demand, this summer they will be scaling back the plant shut-downs that normally occur this time of year. The price of diesel fuel has remained fairly stable, too, and, in fact, dropped during March and April when it hit a low of $3.89—its lowest level since early last August. As a result, in April the Department of Energy held its 2013 average diesel price forecast at $3.90 per gallon.
That's down from last year's average of $3.97 a gallon. Still, the U.S. economy continues to grow slowly taking two steps forward one month and one step backward the next. Officially, the U.S. economy grew at a 2.5-percent annual rate in the fourth quarter of 2012, which is faster than previously estimated. This was still below economists' forecast of 3 percent.
Economic growth slowed somewhat as 2013 progressed, but truck tonnage through the first quarter increased 3.9 percent compared with the same period last year. This was the best tonnage growth rate since the last quarter of 2011. However, trucking is facing several looming obstacles as we reach the mid-year point.
Right now freight demand is about equal to the amount of freight hauling capacity in the industry. But through the summer it is expected that freight tonnage will increase in part due to the $50 billion in Hurricane Sandy recovery funds coming on line. With the present tight supply of trucks, an increase in tonnage of just a few percentage points could tip the balance of supply and demand significantly in truckers' favor. In addition, changes in the Hours of Service rules are expected to reduce fleet productivity by 3 to 5 percent. (These changes, which kick in on July 1, will take one hour out of a driver's current work day.)
Even a 3-percent decline in productivity will be sufficient to further tighten capacity due to the reduction in driver productivity.
To make matters worse, rules dealing with speed limiters, revised drug testing procedures, the medical certification process, the Compliance Safety and Accountability (CSA) program, and others coming down the regulatory pipeline could force many drivers out of the industry. As a result, by year-end—according to some estimates—there could easily be a shortage of 300,000 drivers. Since the Great Recession, truckload capacity has declined 20 percent and hasn't been replaced. In addition, there is a slow, steady and largely unnoticed downsizing of fleets that is impacting freight hauling capacity.
The average tractor age among truckload fleets is now around 6.7 years, up from 5.5 years in 2004. To replace all those old trucks with new ones to get back to the 5.5-year average, the industry would have to spend $24 billion within a 24-month period. But banks are not going to lend that kind of money to an industry that has a very unimpressive return on assets. As a result, fleets are trading in two or three trucks to buy one new one.
So they are slowly shrinking while freight hauling capacity continues to contract. Large carriers also are continuing to move away from long-haul operations to regional, dedicated, intermodal and brokerage services, leaving traditional long-haul service to smaller fleets. Small carriers are increasingly struggling with the Hours of Service rules and the other productivity-sapping regulations that are coming. It is very difficult for many small- and medium-size fleets to replace their older trucks with much higher cost—30 to 40 percent higher—Environmental Protection Agency-compliant new trucks.
They are having trouble finding sufficient credit to buy new trucks, which in turn makes it difficult to recruit drivers. Further, shippers are becoming reluctant to rely on these competitively disadvantaged small carriers and are strengthening their relationships with the larger, better capitalized fleets. All of these factors are pushing more of these smaller carriers out of business. In fact, trucking failures doubled in the first quarter of 2013, reaching the highest level in nearly two years. This failure rate is expected to keep rising because fleets' costs are increasing twice as fast as revenue. Truckers' costs are up 5 to 7 percent per mile while their rate increases are only up 2 to 3 percent per mile.
The result is that there are fewer trucks running down the highways. The good news is that this shrinkage in capacity will result in carriers being able to raise freight rates probably in the 1.5- to 2-percent range, although they won't see too much improvement in their margins since they will need to increase driver pay in order to keep truck driver seats filled. Even the larger freight haulers will not be expanding their fleets given the rising prices of equipment, maintenance costs and driver wages. However, they will still concentrate on replacing older trucks with more fuel-efficient ones. In the second half of the year we can expect freight volumes and rates to increase.
The longer-term track for tonnage growth remains upbeat, as year-to-date figures compared with the same period last year show tonnage is up 4 percent. In April, Class 8 truck orders remained above 20,000 units for seven consecutive months and order cancellations fell to their lowest levels since the third quarter of 2010.
This is an important statistic as it is a significant measurement of truckers' confidence. The equipment finance industry is also becoming increasingly optimistic despite concerns over the economy and is beginning to extend lending to middle-size fleets again. As a result, most economists are forecasting that the second half of the year should see a stronger rate of growth in the GDP and freight tonnage should increase due to accelerating housing and commercial building, increased domestic oil production, the return of manufacturing to the U.S. and continued low-inflation rates.
Although the Rubber Manufacturer's Association (RMA) doesn't perceive there will be much growth at all in the medium/heavy truck tire market, tire manufacturers have already geared up to attack it when this sector's demand for tires does accelerate. This year several companies—including Continental Tire the Americas L.L.C., Michelin North America Inc. and Yokohama Rubber Co. Ltd./ Yoko-hama Tire Corp.—announced plans to increase truck tire capacity at existing plants or build new ones here in North America. In addition, Michelin, Yokohama, Toyo Tire USA Corp. and TBC Wholesale Group have announced upgrades to their commercial truck tire dealer and national account programs or sales forces, vowing to recommit themselves to this market.
Michelin made a major expansion of its Commercial Service Network by adding 41 Boss Truck Shops across the country and 14 T&W Tire locations in Oklahoma and Texas, bringing the network to more than 544 locations throughout the U.S. Finally, Goodyear cut the ribbon on its long-awaited, new global headquarters last month in Akron, clearly demonstrating that it is still committed to the former "Rubber Capital of the World."
These are all good things for the commercial truck tire market and the tire industry in general. While buildings, sales programs and service networks are great, many tire companies also have introduced a drove of new truck tires. Bridgestone Americas, Cooper Tire & Rubber Co., Goodyear, Michelin and Yokohama all have rolled out new, black-and-round commercial products this year.
Going a step further, Bridgestone resurrected its Dayton medium truck tire brand, which it had retired in 2011, to expand its product line and appeal to the lower-cost end of the commercial truck tire market. And the retread side has not been forgotten either. Bridgestone, Continental, Marangoni Tread North America and Michelin— as well as its Oliver brand—have already announced SmartWay-verified retreads.
Continental is pressing ahead with its charge on the retread market by adding two more dealers to its growing retreader network: Hill Tire Co. in Forest Park, Ga., and Y Tire Sales Inc. in Los Angeles. That brings the number of Conti-LifeCycle licensees in the U.S. to eight—with more in the offing. On the technology side, this spring Continental introduced its ContiPressureCheck tire pressure monitoring system (TPMS) for commercial vehicles. It uses TPMS sensors attached to a tire's innerliner and advises the driver of tire problems.
As you can see, no tire company is sitting on its hands in regard to the commercial tire arena. With rubber prices hitting new lows and oil prices fairly stable, tire prices should remain under control the rest of the year. There should be plenty of supply as well since there is limited growth in truck and bus tire demand. This could set the stage for some price cuts as all of these commercial tire competitors belt it out for the hearts and minds of truckers and market share.
There is a lot going on in the commercial truck tire market at a time that is still problematic for truckers. It's a great time to be a participant in this business and face the challenges—both economic and competitive—that loom before you.