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Trucking industry to be dealt wild cards: Researcher

LAS VEGAS, Nev. -- In keeping with the Las Vegas theme at this year's Heavy-Duty Dialogue, Kenny Vieth, a partner w...

LAS VEGAS, Nev. — In keeping with the Las Vegas theme at this year’s Heavy-Duty Dialogue, Kenny Vieth, a partner with A.C.T. Research addressed several wild cards that could have a major impact on the trucking industry, particularly for parts suppliers and distributors, in the immediate future.

Oil Prices
For every one cent rise in fuel prices at the pump, US$2 billion is diverted from the US economy towards energy spending, Vieth pointed out.

“Instead of buying goods that would require trucks, we’ve bought gas instead,” he explained. In fact, he said over the past few years, $300 billion each year was diverted from goods to gas. “That’s a lot of freight up in smoke.”

Even more disconcerting, is the fact fuel prices appear poised to increase further.

“What concerns me is not where the cost of gas and diesel prices are today, but potentially where they could be by early 2010 without oil price relief,” said Vieth. He noted that for every $5 increase in the price of a barrel of crude oil, gas and diesel prices eventually rise 20 cents per gallon. If that relationship is maintained, it would suggest a $95 per barrel price for crude oil would result in $4 per gallon pump prices.

“Four dollars a gallon from 2007 levels would divert an additional $160 billion from goods to gas,” said Vieth. “If we see $4 per gallon gas while the economy is still dealing with the aftermath of the housing bubble, economic weakness deeper into 2008 would appear to be unavoidable and a Q2 or Q3 recession would be a likely outcome.”

Used truck prices
In the US, at least, used truck prices are expected to remain strong, according to Vieth.

“Consistent pricing for used Class 8 tractors has been maintained even in the face of a freight recession and significant excess capacity,” he explained. That contrasts the last US recession in 2001, when used truck prices were essentially halved.

One of the factors driving used truck prices in the US is a thriving export market. US exports of used Class 8 trucks more than doubled in 2007. Exports to Canada also doubled, thanks to the Canadian dollar’s strength against the sagging greenback. Emerging markets in Russia and Nigeria also helped on this front, Vieth explained.

“We believe demand for used trucks will remain strong because of exports and because of rising new truck prices,” he said.

Pre-Buy III
Will there be a pre-buy before the next round of emissions standards are implemented in 2010? “The short answer is yes,” Vieth said.

He said EPA2010 will add another penny of ownership costs per mile for new trucks. The good news, however, is that the 2009 pre-buy will not be as severe as previous versions, he said.

“In 2006, the US economy was at the peak of its cycle and truckers were at the peak of their profit cycle. The conditions were perfect for the storm of supply and demand that occurred,” Vieth explained. In 2009, Vieth pointed out the economy will still be struggling, freight volumes will be weak and there will be lingering over-capacity. Still, Vieth said the industry will not escape the effects of a pre-buy altogether.

There are many reasons why a pre-buy will be unavoidable, Vieth said. He pointed out early adopters of the newest technology have no way to recover their investment, the first customers will get the bugs that weren’t worked out in testing and then there are issues involving parts availability and technician training.

“You’ve got a pretty compelling reason, at least initially, to avoid the new equipment,” he said.

China and India
The burgeoning economies in China and India are another wild card the industry will be dealt in coming years, noted Vieth.

In 1999, there were 344,000 trucks built in China and India. That number surged to nearly one million units in 2006, Vieth pointed out, and he expects that to reach the 1.5 million mark within the next five years. Most of the growth in China will be at the heavy end of the spectrum, with medium-duty commercial vehicles being displaced by larger truck and tractors. Vieth speculated there could be a need for two to three million trailers in China before long.

“Both countries are on the fringes of major transformations in the way goods are transported,” Vieth said.

As for Chinese truck manufacturers, Vieth warned they will likely move into the North American market, but it’s not likely to happen anytime soon.

“Chinese companies have their hands full keeping up with demand,” he told the audience of heavy-duty parts suppliers and distributors and truck OEMs. “They’re so busy rising up the quality ladder that they won’t be significant players in North America or Europe for five, maybe even 10 years. At some point thoughthe Chinese and then the Indians will be your toughest competition.”

Vieth said any supplier that wants to maintain control of its destiny needs a presence in India and China “whether you’re large or small.”

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