Fisher: What will 2020 bring for industry?

Can you believe it? We are at the start of a new decade in the New Millennium.

2019 seemed to go by so fast. I don't know about you, but I thought I'd be dead by now. What a shock and what a very happy surprise.

Since we're still alive and have a whole new year ahead of us, it's probably a good idea to drag out and dust off my old crystal ball again and see what 2020 has in store for us. Who knows, maybe it will be filled with more good surprises.

The economy

Let's first look at the economy because this is what drives trucking and your commercial tire business. 2018 was the best year in history for the trucking industry; 2019 — not so much.

According to the International Monetary Fund (IMF), the U.S. gross domestic product (GDP) — which is an indicator of economic growth — grew 2.9% in 2018 and just 2.4% in 2019.

Tariffs have been the root cause in slowing down not only the U.S. economy but the entire global economy as well. The tax cuts in 2017 boosted manufacturing, a primary source of freight, to record levels, but the tariffs stunted that growth and hastened the economy's return to a more normal level in 2019.

Consumer and business confidence have been affected by political dysfunction and the China-U.S. trade war, which brought a wave of new tariffs that disrupted global supply chains. The uncertainty has prompted businesses, especially those in manufacturing, to be more cautious about investing.

As a result, industrial production, manufacturing, construction and durable goods orders for 2019 were flat or worse.

The good news is that thanks to the growth in e-commerce, consumers are still spending and keeping trucks plying the roads delivering the good stuff they buy and retail and consumption activity makes up 80% of the economy.

As a fun fact to note, e-commerce is about 11% of total retail sales. However, when you drop out automobile dealers, gas stations, restaurants and bars where e-commerce is not a factor, it now accounts for 20% of core retail sales.

The tight labor market is also a concern for businesses. In November last year, the U.S. unemployment rate dropped to 3.5%, which is considered by many to be "full employment." This tight labor market will continue this year.

This is a concern since to maintain a 2% growth rate, 180,000-200,000 new jobs are needed every month. The country will have to either find a way to get more workers or drastically improve productivity.

As a result of all of these factors the IMF has forecast the U.S. economy to expand by 2.1% in 2020, which will be the 12th consecutive year of growth, albeit at a slower pace than the past couple of years.

Freight market, rates

While the economy grew overall in 2019, trucking tonnage experienced a monthly roller coaster ride, rising one month and dropping the next. Nonetheless it was still a pretty good year in terms of freight volume. Carriers didn't do well in 2019, however, because freight rates fell and cost increases such as driver compensation and insurance didn't.

Small carriers that are dependent upon the spot market experienced a sharp drop in spot rates last year which resulted in a surge in for-hire carriers going out of business. (Spot market rates in trucking are the shipping prices that exist right now. They represent how much it costs to ship cargo if you were to get contracted on the spot.)

Sky-rocketing insurance premiums of around 20% to 30% caused by incredibly high jury awards in accident cases also helped push many carriers over the edge. In fact more than twice as many motor carriers (640) closed their doors in the first half of 2019 than in all of 2018 (310).

However, this year the general outlook is for a gradual firming of rates due to truck availability being more constrained compared with 2019. Contract rates should fall 5% to 10% this quarter from last year but firm up as the year progresses by about 2%, which would bring them back to 2018 levels. Spot market rates should bounce back 4% to 6% by the second half of this year.

Driver shortage

The driver shortage remains fleets' top concern according to a survey conducted by the American Transportation Research Institute (ATRI) late last year.

According to the American Trucking Associations (ATA), the industry was short about 61,000 drivers at year-end 2018, which was an all-time high. The industry and the U.S. government are looking at ways to address this problem, including opening interstate commercial driver licenses to younger drivers.

Currently drivers must be 21 to drive trucks across state lines, but younger drivers can drive trucks intrastate legally in most states. Efforts are also being made to attract more women into the industry. Women make up 47% of the U.S. workforce but only 6% of truck drivers.

Fuel

Prices for both gasoline and diesel remained fairly stable and relatively low in 2019, averaging $2.60 and $3.06 per gallon, respectively. However, there will be one exceptional factor that could impact diesel fuel prices this year.

The International Maritime Organization (IMO) sets regulations for ocean-going vessels like container ships. Beginning Jan. 1, it is requiring all ships that used to burn almost 4 million barrels a day of low-grade diesel fuel that is high in sulfur and emits a high level of pollutants into the atmosphere to either convert to low-sulfur fuel commonly used by commercial trucks or use million-dollar, maritime emission scrubbers to reduce emissions.

Because the maritime industry was not given much time to comply and install scrubbers, it is estimated about 75% to 80% of these vessels will switch to low-sulfur diesel.

The U.S. Energy Information Administration (EIA) believes this mandate could push the price of diesel higher by as much as 20 - 25 cents. However, these price hikes should not last long as refineries adjust their production to accommodate this new demand. For the year, the EIA forecasts diesel to average $3.09 and gasoline $2.56 per gallon.

Truck and trailer sales

The large number of new truck sales in 2018 that were due to customers desperate to move goods and willing to pay high rates resulted in the fastest fleet growth since 1999. Now there are about 75,000 more tractors in the market than are needed to haul the current level of freight.

Near the end of 2018 active capacity was up 10% over early 2018 despite slowing economic growth. As a result the overcapacity in the industry now is estimated to be about 13% compared with January 2018.

Class 8 production should end up around 353,000 units for 2019 when the final numbers come in. But demand in 2020 will return to a more normal level and drop to around 260,000 units as fleets will only be replacing equipment rather than expanding their fleets.

This replacement cycle should last for three years into 2022. Last fall this new purchase cycle forced Daimler Trucks North America, Navistar Inc., Volvo Trucks North America and Mack Trucks to announce that they are all taking steps to reduce build rates.

The dry van trailer market, however, is still going strong even as freight growth is slowing. At year-end large fleets ordered their normal numbers of trailers to cover their annual replacements, which reflects confidence in the freight market in 2020.

The vocational trailer markets such as flatbed and dumps are struggling and will continue to do so until the industrial sectors of the economy begin to strengthen. It is expected that trailer production should come in at around 325,000 in 2019 and ease back to 274,000 in 2020.

Trailer manufacturers too are concerned that the extra manufacturing capacity trailer makers added in the last couple of years to handle trailer fleet expansions is now not needed and they will have to pull back on their production. Until this happens it is expected that trailers will be priced lower by some trailer makers to fill added production lines until capacity gets in sync with the demand.

Government's impact

A government action that is vital to the trucking industry is the U.S.-Mexico-Canada Agreement (USMCA), the trade deal that overhauls the North American Free Trade Agreement (NAFTA). This pact will take effect in 2020 after being approved by the House of Representatives. The Senate is expected to follow suit early this year after the impeachment trial of President Trump.

Among other provisions, the USMCA requires vehicle makers in all three countries to obtain 75% of their automotive content from within North America to qualify for duty-free benefits in transporting vehicles and parts across borders. This is up from 62.5% under NAFTA.

Also at least 40% of vehicles' components would have to originate in places where hourly wages are at least $16.

The pact also requires Mexico to allow workers to form independent unions, which is different from the mostly employer-controlled unions under NAFTA that kept Mexican wages much lower than those in the U.S. or Canada. The labor provisions of the USMCA are expected to create an estimated 175,000 jobs in the U.S., the Trump administration is claiming.

This pact is essential to trucking since the vast majority of trade between Mexico and Canada is moved on trucks with $772 billion worth of goods crossing our borders every year. This supports nearly 90,000 Americans in trucking-related jobs and generates $12.6 billion in annual revenue for the trucking industry.

The biggest source of change and uncertainty for the trucking industry as well as just about every other U.S. industry is the trade war between the U.S. and China. The trade war — which resulted in the U.S.'s imposing import taxes on $360 billion in Chinese products and China taxing $120 billion in U.S. exports — continues to wreak havoc on American exporters and manufacturers and has affected the economy and the freight generated for the trucking industry.

After more than 18 months of economic sanctions and tough talk, it was announced on Dec. 13 that an initial agreement, Phase 1 of the final trade deal, had been reached. As a result President Trump agreed not to hike tariffs on $250 billion in Chinese goods to 30% from 25%.

In addition, the Chinese agreed to buy $40 billion to $50 billion worth of American agricultural products annually along with implementing new guidelines on how it manages its currency. China will also strengthen protection for American intellectual property and give financial service companies more access to China's market.

Mr. Trump then canceled plans to impose tariffs on nearly $160 billion in Chinese consumer goods on Dec. 15, and China also scrapped plans for new tariffs set to go into effect that day, too.

The resolution of the trade war between China and the U.S. has a high upside for trucking as it would accelerate the global economy and spur a strong rebound in manufacturing and commodity pricing. Talks are expected to continue immediately and extend well into 2020.

Also of great importance to the trucking industry is the Federal Motor Carrier Safety Administration's (FMCSA) current overhaul of its Hours-of-Service rules. Its proposed changes announced last August give fleets and drivers more flexibility without compromising safety.

The proposed changes would:

• Extend the radius of the short-haul exemption to 150 air miles from 100. Currently only fleets that operate within a radius of 100 air miles are not required to keep a record of duty status or take a 30-minute break.
• Extend the maximum on-duty limit of short-haul fleets to 14 hours, up from 12 hours.
• Increase the maximum 14-hour duty period by two hours to allow for up to 13 hours of drive time and up to 16 hours of on-duty for "adverse conditions" such as weather.
• Split up the 10-hour off-duty rest period, either by taking eight or seven hours in the sleeper berth and then spending two or three hours in off-duty status. The off-duty breaks would not count toward a driver's 14-hour on-duty window.
• Allow drivers to satisfy the 30-minute break requirement by using off-duty status. Drivers can extend a break for up to three hours without counting it as on-duty.

The FMCSA is now reviewing comments from the industry that it received and should be finalizing the rule sometime this year.

Jan.1 was supposed to be the start of the California Air Resources Board's (CARB) enforcement of the federal Greenhouse Gas (GHG) Phase 2 emission standard for trailers.

This regulation for the first time requires new trailers to meet emission standards by being equipped with features that reduce aerodynamic drag, low rolling resistance tires, tire pressure monitoring/automatic tire inflation systems and weight reduction measures.

CARB decided not to enforce this regulation since there is litigation challenging the federal GHG trailer requirements, which is preventing the EPA from enforcing these rules as well. At this time no one knows when or if this regulation will ever be enforced.

The 2015 FAST Act is the five-year highway authorization measure that is due to expire in October. Congress has been trying to come up with a way to pay for fixing the nation's roads and bridges and reduce chronic congestion on the highways for years.

Even though investing in the country's transportation infrastructure has the clear support of the American public, it has not been able to get the job done since it is reticent to increase taxes. The current fuel tax rate (24.4 cents per gallon for diesel and 18.4 cents per gallon for gas) was set in 1993.

However, the need to improve the country's roads is occurring at a time when ground transportation is being transformed by advances in vehicle autonomy, manufacturing, warehousing, supply chain automation, increasing e-commerce and consumers' demand for faster and more responsive deliveries.

It appears that Mr. Trump's impeachment inquiry has distracted Congress, and we probably will have many short- term extensions, just like in the past, when the October deadline passes without a solution.

Truck tire sales

According to the U.S. Tire Manufacturers Association (USTMA), medium truck tire shipments to original equipment truck and trailer manufacturers rose 2.7% in 2019 to 6.6 million units from 6.5 million in 2018, while replacement truck tire shipments fell 11.7% to 19.2 million from 21.8 million units.

The association has not released its forecast for 2020 yet, but it is safe to assume that OE shipments will see a drop of at least 5%, while replacement truck tire shipments should see single-digit growth compared with 2018.

Retreading should continue to profit from the tariffs that have eliminated lower-priced Chinese tires and retreaders' efforts to educate fleets on the benefits of retreads, the advancements in the retread manufacturing process, and the impact sustainable solutions can have on a fleet's bottom line. These factors should result in single-digit growth in retreading in 2020.

Truck tire prices

The easing economy will most likely balance out the supply and demand for truck tires that was exacerbated by the sharp drop in Chinese truck tires coming into the country as a result of the combined 69% tariffs imposed by the International Trade Commission last year and raised again by the U.S.-Chinese trade war.

This year there will be some upward pressure on tire prices due to increasing raw-materials costs.

U.S. domestic production alone cannot meet the trucking industry's demand for tires, but with lower OE tire demand and the influx of truck tires from Vietnam, Thailand, Malaysia, etc. replacing Chinese production, supply should be eased.

Technology trends

Technology is rapidly transforming the trucking industry at a rate never seen before. Naturally, if trucks and truck operations change, so will truck tires and truck tire dealers and service providers.

The biggest change occurring right now is the electrification of Class 8 trucks along with light-duty delivery trucks and vans used to deliver freight in the last mile. Most truck manufacturers in North America and Europe are working on developing electric trucks.

In 2019 their efforts gained momentum with more investment, more prototypes unveiled, and more deployments in real-world freight operations.

Electric trucks hold great potential for reducing diesel expenses and helping the transportation industry meet existing and future emissions regulations in markets around the world. At this stage, though, these trucks come with higher costs than diesel models, as well as vehicle range limitations and added weight that can reduce payload capacity.

Electric trucks have created the need for specific tires that can handle higher torque and the scrubbing and tire wear that quicker accelerations from electric motors apply to the axle ends. They also have to weigh less in order to extend the range of these vehicles and maintain payload capacity.

So, it doesn't look like 2020 is going to be a bad year, but it's probably not going to be a stellar year either. Fleets are cautiously optimistic and were given a ray of hope recently that saber rattling over trade is decreasing and freight tonnage might gain strength this year.

This should bode well for the commercial tire market as replacement sales should increase somewhat, supply should improve, and retreading should have the best year it's had in a while.

But whatever happens, what the new year brings to you will depend largely on what you bring to the new year. So bring on your best!

Happy New Year!