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Outlook 2009

TORONTO, Ont. - You know times are hard when you're attending the track on economic issues at the Ontario Trucking Association's annual conference and the president of a well-respected and award-winni...




TORONTO, Ont. –You know times are hard when you’re attending the track on economic issues at the Ontario Trucking Association’s annual conference and the president of a well-respected and award-winning motor carrier confides in you that it’s a good thing these seminars were not being held on the third floor or there might be people jumping out the window.

Although this particular carrier is well enough positioned to survive the economic onslaught, the reality is many will not. Already about 2,700 trucking companies have closed their doors in the US. In Canada trucking bankruptcies in the first half of 2008 had already surpassed the total for all of 2007.

And the message delivered from the experts speaking at OTA’s economic sessions was that it’s only going to get worse. “Antacids would be helpful,” was John Larkin’s advice before the managing director, transportation at Stifel, Nicolaus & Company, pro- vided his analysis of US market conditions and their likely impact on trucking.

“The short-term looks very bleak. It’s almost a bottomless pit. It’s time to hunker down and control costs,” was Larkin’s advice.

Meny Grauman was even more direct in prefacing his remarks about global economic conditions and their impact on Canada in general and trucking in particular.

“There are many words to describe the global conditions right now and they’re all four-letter words,” said the executive director and senior economist for CIBC World Markets.

It’s not all doom and gloom, however. There are some rays of sunshine and the long-term forecast for trucking -for those resilient enough to weather the current storm, anyway -is actually a bright one.

But first let’s examine the makeup of those ominously dark clouds on our economic horizon.

Larkin said October was probably the worst freight environment US carriers had seen since deregulation. Trucking is a sector very negatively impacted by economic downturns (tracking of such downturns over the past several decades shows trucking tends to experience deeper troughs when the economy heads into recession) and there are an overwhelming number of signals driving both a freight recession and a North American economic recession.

Industrial product tonnages were down 10% in October, Larkin said. Not only does that indicate there are fewer products being shipped but it also points to an acceleration of the existing trend towards manufacturing lighter, more condensed products.

“Shippers are looking to take weight and volume out of everything shipped,” Larkin said. “Three flat screen televisions take the place of one old-fashioned CRT screen TV.”

Truck tonnage did actually improve slightly over the spring and summer in the US but Larkin said that was misleading. A good chunk of that tonnage can be attributed to intermodal moves where trucks were primarily used to move low-grade raw materials to ports. (The drop in value of the US dollar earlier in the year created a mini export boom for US exports).

Larkin said a more accurate picture of freight volumes comes from examining miles driven and loads handled, which show much more negative patterns. Both dry van and flatbed loads declined sharply in September. Reefer loads are also contracting. TL mileage is down 0.8% and Larkin expects LTL mileage to have gone negative by October.

Grauman didn’t supply similar statistics for the Canadian trucking industry but our own national survey of Canadian motor carriers (conducted late this fall in partnership with Shaw Tracking) found motor carriers in a predictably pessimistic mood.

Only 19% of carriers surveyed expected freight volumes to increase next year while the vast majority (42%) expected a decline. Accordingly, the majority (47%) saw no improvement in freight rates next year, while a quarter of carriers projected a decline. Asked to rate their optimism for company growth next year on a scale of 1 to 10, the average mark given was 5.1.

The pain of the freight recession is reflected in the shrinking of fleets across the continent. The 2,700 trucking companies that already bit the dust in the US during the first three quarters removed 130,000 trucks from the system. About one-third of those were sold overseas, with the remaining two-thirds depressing truck prices in the used truck market.

The survivors are shifting their market strategies and downsizing their operations.

“All of the big TL carriers are moving down into regional lanes, forcing smaller carriers into the long-haul lanes, which they are ill-equipped to handle,” Larkin said.

Large fleets have reduced capacity by 3.3% while small fleets have reduced capacity by 13.6% so far.

Any hopes for a substantial pre-buy is out of the cards for most US fleets, according to Larkin, who added that average fleet age is rising to five years from the previous three years. Our survey of carrier buying intentions north of the border found that only 17% of Canadian carriers were looking to pre-buy -a far cry from the one-third who employed a pre-buy strategy prior to the 2007 emissions deadline.

“Everyone is climbing into the bunker and hoping they will survive,” said Larkin.

Several economic factors in the US and, to a lesser extent in Canada, are making for a bunker mentality.

Retail sales in the US have been nose-diving since September 2007 and US consumers are no longer able to keep up their spending habits of the past decade. The savings rate for US consumers used to be 10% in more financially conservative times but by the 1980s it had dropped to 0%.

“People could almost rationalize having 0% savings because the value of their homes was increasing as was the value of their stocks. Now with both of those down, the only way to get to 10% savings is to reduce consumption,” Larkin said.

A good chunk of freight is tied to residential construction and moving-related consumption (people wanting to renovate once they move into a new house) yet US home sales remain low while housing starts “have come to a screeching halt,” according to Larkin.

The second quarter recorded the largest year-over-year drop in home values in 20 years -about 15% on average but as much as a 30% drop in previously hot markets such as San Diego, Las Vegas, Phoenix and Miami.

The situation is certainly not as dire in Canada, Grauman pointed out, but there is need for concern. Our housing bubble was smaller and shorter than that experienced in the US but housing prices are starting to fall. They’re about 15% lower than they were last year, Grauman said. Even though he doesn’t anticipate a housing crash in Canada, there is no way to avoid the impact of the US economic meltdown.

“The Canadian economy is weakening. Labour markets are still showing new jobs being created but that is going to change. Just you wait,” Grauman said. “What’s happening in the US is very serious; it’s going to affect us.”

The performance of the TSX at the time of Grauman’s remarks was the third worst since WWII and just slightly away from becoming the worst.

It could take three to five years to get the market back to where it was before the decline.

Another dangerous signal about the plight of the US economy is the manufacturing sector. The manufacturing index is at a 26-year low, Larkin emphasized.

“New manufacturing orders have weakened dramatically during the past several months. I don’t see how you are going to get a whole lot of improvement by December,” Larkin said.

The plight of the automotive sector in particular has been well documented or, as Larkin put it: “The Big 3 may end up as the Medium-Sized 2.”

But if Detroit’s Big 3 do prove successful in getting a bailout package (by press time, they had succeeded -but it was only half of what they had requested) from the new administration in the US, that may not be good news for Canada, cautioned Grauman.

“Our auto industry is tied to the US. What happens with the US bailout could affect us if the bailout requires a pull
-out of Canada. It’s hard to see a situation where the US government provides a bailout so Canadian plants can stay open,” Grauman said.

The credit crunch on both sides of the border is making it hard for companies to borrow the money necessary to grow and squeezing leveraged capacity out of the market place.

There are some rays of sunshine amidst the dark clouds, however, and the forecast for the long-term is an optimistic one.

Bulk tank loads are still growing, in part due to government programs pushing ethanol production. And as bad as the manufacturing sector indicators look, manufacturing inventories are looking lean.

“I think that’s good for transportation because when demand pops back in, you won’t have to work through a lot of excess inventory. That’s another ray of sunshine,” Larkin said.

Grauman added that while Canadian banks are “hobbled,” they are much better off than the financial institutions in many other countries because they took fewer risks during the previous economic boom. And both Canadians and the federal government are in better financial shape than most.

The debt load per capita in the US is $62,000 compared to $35,000 in Canada. Ottawa has also been running balanced budgets, paying off its debt load faster than planned. Compare that to what could amount to more than a trillion- dollar deficit for the US.

“We are in a better situation than any other country in the world. It gives us more leverage,” Grauman stressed.

The Canadian economy, and our dollar, are also strongly linked to domestic fuel production and Grauman believes that despite the record-fast drops in fuel pricing, the long-term trend still points to high energy pricing, particularly when China and India have millions of people ready to buy their first cars.

“Oil supply is not growing and we don’t expect it to. When the economy picks back up, demand will come back strong,” Grauman said.

The biggest ray of sunshine was delivered by Larkin: “Over the long-term, truck supply is going to be very constrained and once demand picks up we are going to have the best trucking environment we’ve ever seen. The survivors will do very well.”


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