Fisher: Commercial industry remains bright spot

Can you believe the freaking year we've had?

Twelve months ago nobody, with the exception of some long, gray-haired hippies tripping on some bad acid left over from the Sixties, could have predicted the unbelievable pandemic of 2020 and its colossal impact on the world.

In a few short months after the pandemic hit, state lockdowns closed schools and businesses and kept people at home, upending life as we knew it. Panic swept through the nation as people hoarded flour, paper towels and, inexplicably, toilet paper.

Bars, restaurants, theaters and sporting events were closed for fear of spreading the COVID-19 virus. The unemployment rate skyrocketed to 14.7% in April from 3.5% in February.

Hospitals were filled to capacity and thousands died in the U.S. By the end of the year, the death toll in America was more than 300,000, and more than 11 million Americans were unemployed. Unbelievable.

Normally at this time of year, I dust off my crystal ball and look deeply into it to see what the future has in store for the commercial truck tire market. But to be honest, the chronic uncertainty that has been endemic in the world has made me a bit afraid and the ball cloudy if not downright murky.

However, if I muster my courage and look at several important areas of the trucking and commercial tire industries, we may find knowledge that will help explain what's to come.

The economy

Let's first look at the economy because this is what drives trucking and your commercial tire business.

The U.S. experienced the shortest recession in its history during the second quarter of 2020 as states across the country basically shut down their economies in an effort to slow the spread of the coronavirus.

The gross domestic product (GDP) dropped a whopping 31.4% that quarter. But once some states started reopening, what followed was a steep rebound in the third quarter when people started spending again.

Since consumers couldn't spend their money in the service sector of the economy (bars, restaurants, entertainment venues, travel, etc.), they shifted purchases to the retail sector. Instead of doing fun things away from home, people stayed home and spent their money on "things" (all of which are delivered by trucks).

In addition, they made a huge shift to online purchases. The government stimulus money contributed to this retail spending, which increased 10% over 2019.

However, this shift in spending created chaos in the supply chain. The food market is set up around the wholesale side, which supplies restaurants and food concessions with larger packaged foodstuffs.

But when the wholesale side was basically shut down, and everyone had to go to the grocery store to get the smaller-sized canned and packaged goods for their families, the supply chain was not, and still is not, prepared.

As a result products became scarce on shelves, and people started hoarding. (However, there still is no rational explanation for why people hoarded toilet paper.)

The U.S. economy appeared to be slowing after the record 33.1% jump in gross domestic product in the third quarter. In response to this, the Federal Reserve kept its short-term interest rate, which influences many corporate and individual loans, at a record low near zero and continues to buy bonds to keep long-term borrowing costs low.

Parts of the economy, e-commerce, home improvement and residential construction. are all doing well, which is good for trucking. But other parts of the economy are atrocious, such as travel and tourism, entertainment and other services.

The pandemic relief economic stimulus package Congress passed Dec. 21 should speed up recovery for both individuals and businesses.

Up until Dec. 11, when the Food and Drug Administration granted an emergency use authorization for the Pfizer COVID-19 vaccine, the outlook for the economy was extraordinarily uncertain.

However, now that the vaccine is here and distribution has begun, things are becoming much clearer. Some analysts think that by mid-2021, the country will begin to put the COVID-19 pandemic behind as the vaccine is injected in arms around the nation.

By mid-year, we should reach herd immunity where two-thirds of the population has had the disease or has been vaccinated, and the economy should begin to stabilize.

It is estimated the damage to the economy will take at least a year to repair. Once COVID is under control, GDP growth could be as much as 4% in late 2021 or early 2022. Only then will we see things get back to "normal."

Freight market and rates

Trucking is one of the few bright spots in the economy. The trucking, freight and logistics industry economy is performing far better than the overall U.S. economy.

Capacity in the industry is as tight as it has been in years. This is due to an undetermined number of fleets that closed early on because of the COVID-19 pandemic, and those that continued to operate did so with fewer trucks due to a worsening driver shortage. (Year-over-year truckload fleets are operating 3.3% fewer tractors and less-than-truckload carriers are down 4%.)

All sectors of the trucking industry are doing well, especially when measured against 2019 numbers, some better than others. The retail side is very strong, e-commerce is exploding, and groceries, cold and frozen foods hauled by refrigerated carriers is strong.

Flatbed carriers hauling lumber and other building materials as well as carriers that make furniture deliveries saw a spike in business as people refurbished or renovated their homes.

At worst dry van freight fell just 3% year-over-year in April but actually surpassed 2019 levels by 5% in August. While inventories hit an all-time low in June, imports began to surge in August in anticipation of a big Christmas selling season. Through November, tonnage was down 3.9% compared with 2019.

In the second quarter, at the height of the pandemic, e-commerce sales surged 44.5% to account for 16% of $1.31 trillion in total retail sales. This compares with the second quarter of 2019, when U.S. e-commerce sales were just 10% of overall retail sales.

The growth of e-commerce leaped 10 years in just a few short months. (Amazon.com Inc. reported its revenue soared 40% to $88.9 billion in the quarter compared with $63.4 billion the year before.) E-commerce was expected to increase 50% year-over-year during the holidays.

The tight trucking capacity has pushed freight rates up. Contract freight (freight that customers sign contracts with carriers to haul) makes up 80% of the freight that is transported in the U.S., and the spot market (one-time shipping price quoted now) handles the rest.

Early in the pandemic, with demand tightening, spot rates surged by 80% to 90% year-over-year, although that dropped by October to a 40% increase. By November, transportation prices jumped by 30.5% since March and were expected to continue to do so through the holiday season. Contract rates are expected to climb as much as 8% to 12% in 2021, compared with 2020.

For most of 2021 the overall freight environment should remain quite strong. However, freight will level off when we get vaccines that end the pandemic distributed to the populace, and there is a shift away from consumer spending and back toward services.

But economic indicators suggest the trucking industry could be poised for growth in 2021, although freight volumes will not return to pre-pandemic levels until sometime in the second or third quarter.

Driver shortage

The driver shortage continued to worsen in 2020 and some fleets say the situation is the worst they have ever seen, with the number of drivers being about 80,000 fewer than there were a year ago.

Since last January, trucking lost more than 46,000 drivers in the first 10 months of the new, federal Drug and Alcohol Clearinghouse's operation, and only 4,400 have completed return-to-duty requirements. Some older drivers are also reluctant to drive for reasons related to COVID-19, and many simply retired. Others have left over-the-road driving for local, e-commerce jobs that enable them to be closer to home and be home most nights.

The driver shortage also is being impacted by the slow return to normal at state department of motor vehicle offices, which were shut down or operated for six months or more at reduced levels due to the pandemic. This has reduced the number of new drivers coming into the industry since they cannot get commercial driver license testing.

In addition, truck driver training schools' capacity has been limited by coronavirus-related safety precautions (i.e., social distancing and sanitizing equipment), including some lockdowns during severe outbreaks. It is estimated that the number of graduates has been reduced by 20% to 50% last year, compared with 2019.

In addition, generous unemployment benefits drained the pipeline of new drivers.

And to make matters worse, the industry is still plagued with staggering driver turnover, which averages 88% for large truckload fleets and 65% for medium-size fleets. It's no wonder that for the fourth year in a row, the trucking industry has ranked the driver shortage as its No. 1 top industry issue, according to an American Transportation Research Institute (ATRI) survey of fleets.

The driver situation won't change for at least two quarters, although many believe that a new round of pay increases could work to attract new drivers sooner. By year-end 2020, several large carriers had announced pay increases from 4% to 14%. (Driver compensation was ranked as the No. 2 top industry issue.)

Fuel

With so many people self-isolating, working from home and limiting their trips out of the house to just the grocery stores, the demand for diesel fuel and gasoline plummeted in the first half of the year.

By the fall, prices for oil started to increase again and continued to rise every week in November and into December.

As of the beginning of December, the nationwide price for diesel was $2.526 a gallon. which was 52.3 cents less expensive than it was the same time in 2019. Also the nationwide price for gasoline was $2.156 a gallon, which was 40.5 cents less than it was the previous year. A barrel of West Texas crude, the industry's benchmark, closed at $45.76, down from $56.99 a year earlier.

With fuel prices creeping up, more and more oil rigs are operating again. During the week ended Dec. 4, 323 rigs were in operation in the U.S., which was down 476 from the same period the year before when 799 were in operation.

In September domestic production reached 10.9 million barrels per day on average; however, it's nowhere near the pre-pandemic level in 2019, when U.S. wells produced nearly 13 million barrels of oil daily.

Much of the increase in oil production came from the Gulf of Mexico, which began to return to normal after an above average hurricane season caused oil well platforms to be evacuated numerous times to get workers ashore to safety.

Texas continues to be battered by the COVID-19 pandemic. Oil production in the state worsened in September as the state produced the lowest amount of oil in more than 18 months, off 21.2% from the previous year.

The U.S. Energy Information Administration (EIA) expects domestic oil production to average 11.1 million barrels per day in 2021 and the price for West Texas crude to average $44.24 this year.

It also expects diesel fuel to average $2.62 a gallon nationwide and gasoline to average $2.27 a gallon with oil production remaining flat through 2021 and not return to pre-pandemic levels until 2022. However, the EIA stated that this forecast "remains subject to heightened levels of uncertainty because responses to COVID-19 continue to evolve."

Truck and trailer sales

U.S. sales of Class 8 trucks dropped dramatically in April and May and for a time vehicles weren't available because manufacturers temporarily shut down plants due to the pandemic.

Sales recovered gradually in the succeeding months, and manufacturers returned to building trucks at pre-pandemic levels by the third quarter. Sales, however, were below the pace of the previous year since almost all fleets paused or delayed orders because of uncertainty.

However, in November, with freight rates surging to record levels for the previous three months and carrier profits certain to follow, orders for new Class 8 trucks soared to 52,600 units up 33% from October and a 197% improvement over the previous year.

Fleets were confident that consumer-oriented freight will remain strong and industrial freight will improve in the coming months so they placed big orders in anticipation of requiring more trucks throughout the year.

They moved to lock up build slots, which they perceived could be in short supply this year. It is expected that sales of Class 8 vehicles reached around 310,000 units in 2020 while orders at the end of November for the previous 12 months stood at 250,000 units for 2021. With more orders expected to come in the next few months, the industry will have a stable, positive year in 2021.

A similar scenario is playing out in trailer orders. Orders bottomed out to nothing in April and stayed well below 30,000 units a month until September when they soared to a record high of 51,208.

The increase was 174% higher than September 2019's count. But then October trailer orders cleared 54,200 to score the third-best gain in industry history. That compared with 31,786 units in October 2019.

The motivation behind these orders was fleets' need to secure next-year slots for trailers, especially dry vans. Trailer manufacturers' lower build rates pushed fleets to submit their orders faster, rather than gamble that any new units might not be delivered until well into 2021. It looks like the trailer industry also will have a stable and positive year in 2021. Government impact

How the change of president from Donald Trump to Joe Biden will affect the trucking and tire industries is murky until we find out who gains control of the Senate — the deciding seats to be determined in a Georgia run-off election Jan. 5.

The 2015 FAST Act is the five-year highway authorization measure due to expire in 2021, after being extended a year beyond its original expiration date.

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, and 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. It was given a year-long extension when Mr. Trump signed a temporary funding measure that averted a shutdown of the federal government in September.

Moving a massive infrastructure bill through Congress is thought to be part of Mr. Biden's plans for his first 100 days in office, which means, if he is successful, it could theoretically be passed by July.

Creating a sustainable Highway Trust Fund is key in the next infrastructure bill and getting agreement from both sides of the aisle and enough votes to pass it will be a behemoth task.

If another round of COVID-19 economic aid hits a hurdle before Mr. Trump leaves office in January, Mr. Biden will jump on this immediately. House Democrat leaders and Senate Republican leaders agree on the need for another emergency aid measure, but they disagree on topline figures.

Mr. Biden may help them come to a speedy compromise. Back in November he announced the formation of a COVID-19 task force, which he said will shape his approach to managing the surge of reported infections and ensure vaccines are distributed efficiently and equitably. He should be ready to roll out his plans immediately after he takes office.

Mr. Biden wants to keep the Affordable Health Care Act and expand it. It is believed that he wants to create a public option in the marketplace that relies on Medicare with no co-payments that would be available to those who fall below the poverty line and to individuals instead of employee-provided plans.

Under Mr. Biden's leadership, transportation agencies also would adopt a national framework for autonomous vehicles and hold venues that enhance innovation and technological advancements. Providing access to autonomous technology could propel industry efforts that have evolved without congressional policy input and government planning.

Mr. Biden is not expected to roll back tariffs on tire and auto part imports from China.

Truck tire sales

According to the U.S. Tire Manufacturers Association (USTMA), original equipment truck tire shipments for 2020 fell by 29% to 4.6 million units, and replacement truck tire shipments declined by 2.1% to 18.5 million units.

While the association has not released its forecast for 2021, it is safe to say that original equipment truck tire shipments should increase significantly since orders for new tractors and trailers are filling up order boards quickly.

Replacement truck tire shipments should also be strong. With all domestic truck tire plants back up to full production, shortages of truck tires produced in North America should soon be a thing of the past as tire makers rebuild inventories that had been drawn down because of production shutdowns in the first half of the year.

The supply chain is still pretty hosed up for tires coming in containers from Asia, so shortages of these products may linger longer.

Throughout 2020 truck tire prices remained stable until announcements of price hikes for truck and bus radial tires began appearing in October when Bridgestone announced it was raising prices on all Firestone truck tires sold in the U.S. by 5% to 8%, effective Nov. 1.

Sumitomo Rubber North America Inc. and Hankook Tire America Corp. followed suit the next month when Sumitomo raised prices in the U.S. and Canada on Falken and Ohtsu brand truck tires by 6%, and Hankook raised prices in the U.S. on its lines of truck tires by up to 5%, effective Dec. 1.

The reasons given for these price increases were increased shipping and production costs. I expect other commercial truck tire manufacturers are facing the same increases in transportation and manufacturing costs and soon will follow with their price increase announcements.

Technology trends

There are two overriding trends that are affecting both the trucking and the tire industries.

The first is the race to electric trucks. Every traditional, commercial truck OEM, as well as new electric vehicle (EV) manufacturers, are working feverishly to develop commercial electric vehicles from Class 1 all the way up to Class 8, and 2021 is poised to be the year for the technology to transition from pilot testing to commercialization.

Some cases in point are:

• Volvo Trucks North America began sales of its VNR Electric regional Class 8 truck in December with full-scale production at its manufacturing plant in Dublin, Va., beginning early this year.
• Mack Trucks began taking orders last quarter for the Mack LR Electric refuse model powered by a fully electric integrated Mack drivetrain with deliveries beginning in 2021.
• Amazon.com is working in partnership with Rivian Automotive L.L.C., a start-up EV truck manufacturer, to have 10,000 of the Rivian electric delivery vans on the road worldwide by 2022, ramping up to the full 100,000 van order by 2030.
• Daimler Trucks North America starts 2021 with 38 electric trucks in service including 26 Class 8 eCascadias and 12 medium-duty eM2s. Several major fleets are running these trucks, which have about 500,000 miles in service in an effort to fine-tune their performance for these fleets. Daimler plans to start assembling the production version of these trucks in 2022.

As a result of this rapid adoption of EVs, internal combustion vehicle (ICV) sales are expected to peak in 2021, and by 2025 EVs will be more economical than ICVs. By 2030, half of all vehicles sold are expected to be either electric or a hybrid.

Naturally these new electric vehicles need tires designed specifically for them that can withstand curbing and a higher degree of scrubbing as well as provide more traction in high start-and-stop operations. In addition, they must be able to handle the amplified stresses and strains of heavier loads and torque (from the batteries).

The EV truck market is burgeoning, and demand for EV-optimized tires for trucks will see a 29% compound annual growth rate (CAGR) through 2028, and buses will see a 19% CAGR through that period.

The second big trend is the exploding e-commerce market that is changing the way freight is delivered and the vehicles that deliver it. As a result, the light- and medium-duty truck tire market is growing at a much faster rate than the large truck tire market.

E-commerce delivery vehicles are a perfect application for EVs since these vehicles don't travel far, return home every night and can be recharged for operation the next day.

E-commerce requires trucks and vans to travel shorter distances in more urban environments with more frequent starts and stops and carry more weight.

Current light truck tires in the 16-, 17.5- and 19.5-inch diameters never were designed to handle this new set of performance criteria, so tires must be designed specifically for this application. The double-digit growth is this market is certainly an opportunity commercial tire dealers can't ignore.

With the approval of COVID-19 vaccines and the beginning of their distribution, I see that my crystal ball is starting to clear up. 2021 is going to be a much better year than 2020 (how could it not?) filled with hope, opportunity and a brighter tomorrow.

Happy New Year.