Reserved confidence

DESPITE the catastrophic events in the Gulf Coast region from Hurricanes Katrina and Rita, tank trailer manufacturing seems to be on a sure footing, industry representatives say.

“We must keep in mind that we are a very flexible economic system and some of this damage will be offset by other ports, other modes of transportation, grain coming from storage facilities, increased rail and truck traffic, etc,” says Peter Toja of Economic Planning Associates.

David Burke at Boston Steel and Manufacturing thinks the hurricane damage may have a further effect on the oil business, but believes it will be more psychological than actual. “In fact, it may have a long term positive effect with more public support for exploration and refinery additions due to the price spikes and realization that we do indeed need a ‘cushion,’” he adds.

At the same time, others point out that the disaster repercussions have yet to be fully understood. Nevertheless, most of the people contacted by Bulk Transporter pointed out that the last few years have brought an energetic economy to the United States and subsequently to the industry, which puts it in a strong position to recover from economic downtrends.

As for the next few years, industry spokesmen are voicing confidence with some reservations.

“The tank trailer demand has improved significantly in the last year,” says Bob Baker of Semo Tank/Baker Equipment Co. “This relates to both new and used as well. The possible increase could have been stemmed from low sales in years prior, and regardless of the rise of material cost, the market can only hold off for so long.

“At some point, whether it be tractors or trailers, newer more state-of-the-art equipment and the replacement of older just has to happen. As far as next year, I'm holding my breath, but optimistic that the industry will remain constant. The backlogs are getting out there again, which seems nice, but from a manufacturing standpoint presents problems of its own.

“The downturn in the industry from the recent past had some painful gear downs, marginal sales and profits, and even the difficult effects of losing some quality fabricators.

“Gearing up and retraining takes time and money, and while doing so in the effort to take care of and retain your customer, one cannot help but ask ‘How long will it last?’ For a while, we hope. So many things that are outside of what we do, and do well, control our fate, but steady would be a nice trend for awhile.”

Strong year

John Cannon of Brenner Tank Inc says the Gulf Coast crisis will have an indelible impact on the industry, with the repercussions to be later determined. But he pointed out that business continues to be brisk and the current calendar year has been stronger than anticipated in terms of tank trailer demand, especially given the dramatic escalation in many metals prices.

“Next year, we feel several factors will temper tank trailer demand: continuation of abnormally high metals prices, relative to the means of the last decade; driver recruitment challenges endured by carriers; application of limited capital to tractor pre-buys; and the absence of relief from relatively high diesel prices,” Cannon adds.

He expects tank trailer production in 2006 to fall below 2005 levels.

A survey of trailer manufacturers by Economic Planning Associates confirms the upturn in trailer sales through the first six months of 2005, says Toja.

“Tank trailer shipments were running 32.3% ahead of even last year's vigorous first half pace,” Toja says. “Equally important, industry sources are indicating a widespread interest in this equipment from a variety of sources.”

Tank trailer shipments advanced 33.3% in 2004 to the level of 6,200 units, he adds.

“We have seen strong demand this year in all segments,” says Bob Foster of Heil Trailer International. “Our customers have rebounded, adjusted to their costs, and are making money. That is good for the trailer industry, especially since we have experienced the most severe cost increases in our history. These cost increases have forced very rapid price increases for our industry. Despite these price increases, demand is fueling growth.”

Mike O'Donell at Stuart Tanks echoes his colleagues' comments. “This year's orders on new trailers have been on a steady pace all year,” he says. “Again construction-related equipment leads the way with another good year in small cube cement trailers. Large cube pneumatics for foodgrade service and plastics also seem to be in demand.”

Demand is up for stainless steel tank trailers used for chemicals, as well as those for petroleum and foodgrade, O'Donell says.

“Late model used equipment in all categories is in short supply because this type of equipment was purchased early due to sharp increases in new trailer pricing this year, along with longer manufacturing lead times.

Fuel prices

“But I do feel that the current fuel situation will be a larger effect than first thought going into the last quarter and first quarter of next year — and due to the Gulf Coast tragedy, this will bring a larger need for equipment for the next two to three years. The big question mark is do we have the capacity to supply what will be needed at a price that is fair and keep our economy on steady course.”

Driving tank trailer sales has been an improving economy that boosted carriers' business so that many are running equipment 24/7, says Cliff Harvison, National Tank Truck Carriers president.

“It stands to reason that some of that equipment will be either disposed of or downgraded,” Harvison says. “If the economy stays at its present levels, new tanks will be needed so that carriers can maintain present service levels.”

That's the good news. But Harvison points out that carriers are turning down loads because of a serious driver shortage and retention rate. “It makes little sense to add more equipment until you can put a professional in the left front seat.”

The American Trucking Associations estimates the shortage of long-haul truck drivers will continue to increase and predicts the number will reach 111,000 by 2014, if current demographic trends continue and the overall labor force remains stagnant.

At the same time, as housing and other construction perseveres, the future appears bright, says Foster. “Industrial activity remains strong which also fuels demand for trailers,” he points out. “So far, rising gasoline prices have not materially slowed American families from driving and the prices are not even at historical highs when adjusted for inflation, despite all the media hype.

“Unemployment is low and people are working, and things are pretty good for our economy now and into the future if the Feds don't put the brakes on too hard.

“Inflation is amazingly low despite the raw material cost increases, which speaks well for industry's ability to be more productive and hold down price increases.”

Rocky Mountain doubles

At Mississippi Tank Co, the company recovered quickly from severe damage it sustained from the hurricane. After eight days off line, the company was back at work with orders coming in, says Mike Pitts.

This year, sales of double trailers have been on the increase from customers in the Rocky Mountain region, he adds.

“The dynamics of the business is changing in the region,” Pitts adds. “Smaller companies are cutting back services because of increased costs, particularly from insurance hikes, but larger companies are stepping in to fill the gap and are ordering more trailers.”

Because of the insurance hikes, similar changes are occurring for tank trailers that haul anhydrous ammonia. In that sector of the industry, some carriers are buying the tank trailers, but leasing them to other companies, Pitts says.

As for the next year, Pitts predicts a status quo in sales. “It will be hard to duplicate this year, but indicators are that we will.” he says.

Tom Anderson of LBT Inc also is optimistic for the next year. “I would expect industry production to match or exceed that of 1995 and 1998, which also were strong years,” he says. “Demand today is still robust and the industry as a whole has a healthy backlog. I expect production levels in 2006 to be on par with 2005 although there is some softening in the van market, which is sometimes a good future indicator of the tank and dry bulk market.

“The current strong demand follows a three-year period (2001-2003) of very weak demand, much of which can be attributed to events not directly related to the tank and dry bulk industry. As with so many other industries, there was a very tentative approach from 2001 to 2003 with regard to capital spending because of all that was going on both domestically and internationally. When demand started to break loose, it happened to coincide with rapidly escalating raw material costs. Because of this, some of the 2005 demand can almost be deemed panic buying.

“For the immediate future demand remains strong and raw material costs have somewhat stabilized, although at much higher levels. Manufacturers and component suppliers are beginning to catch up.”

Tankwagon segment

As for the petroleum tankwagon segment of the market, David says the demand is down this year after having a good 2004.

“This is largely due to the increase in oil and related petroleum product prices,” Burke says. “The situation puts dealers, home heating oil dealers for instance, in the position that they must outlay a lot more money for the bulk product, thus stretching their bank lines and costing them more money for interest expense.

“In addition, their receivables are up, and their customers are paying slower due to the larger bills. Meanwhile, dealers cannot increase their margins at these high prices due to elasticity of demand. Finally, their customers will conserve whenever possible, thus cutting down on volume usage.

“This is all coupled with an uncertainty toward the future and the associated fear to make a move.”

He points out that despite the extension of the Jobs and Growth Tax Relief Reconciliation Act of 2003, few of his customers appear to have taken advantage of it.

They may have been unaware of the provision, Burke says. It provides a 100% immediate tax reduction of most new and used non-real estate property assets for the year they are put in service.

Up to $100,000 in value originally could be deducted (subject to some limitations) in 2003, 2004, and 2005. The law has been extended beyond 2005.

“As for next year, if prices remain high, I expect the same situation to exist until all parties adjust to it — then maybe we will see more normalcy,” Burke says.

Propane bobtails have faced a similar cutback in sales, according to Pitts. A mild winter snagged propane sales and caused distributors to take another look at capital outlay.

Canadian market

North of the US border, Canadian tank trailer manufacturers report a strong market for sales in Canada and the United States.

Allan Paaren of Tremcar Inc has increased production capacity to meet customer demands for aluminum dry bulk and stainless steel product lines. To meet that demand, the company is opening a new facility in St Jean sur Richelieu, Quebec, Canada. The company also is expanding its aluminum product capacity in St Cesaire, Quebec, and Strasburg, Ohio.

“These expansions are key to growth in 2006,” says Paaren.

He points out that energy prices and US/Canadian exchange rates always influence the company's business strategy.

Denis Marcus at Comptank Corp says the exchange rate has gotten worse in the last year, which has limited sales of his reinforced fiberglass plastic trailers (FRP).

However, the Canadian marketplace is growing. “The oil patch is booming in Western Canada,” Marcus says. That bodes well for FRP trailers used to haul crude oil, acids, and salt water.

“When one market dies, it seems that another starts up,” he adds. “If productions stays where it is now, I think it will be great. I see us maintaining the current status.”

New regulations

While the future looks promising, new regulations could always force the industry to step on the brakes. Several regulations are being considered that could affect manufacturers and carriers alike.

Cannon says that he anticipates several federal and other governmental initiatives that may impact tank trailer specifications in the near future. They include, but are not limited to resolution of the wetlines situation, continued tightening vapor release requirements, adoption of American Society of Mechanical Engineers (ASME) Section XII on cargo tanks, periodic update of hazardous materials regulations, and roll stability proposals.

“The attempt to eliminate wetlines will have a detrimental effect on company profits, thus further slowing demand. This is, in my opinion, an unnecessary and wasteful project,” Burke says.

Addressing weight limits, Cannon says a review of vehicle size and weight allowances may be appropriate to harmonize all North American Free Trade Agreement (NAFTA) countries' rules and address the driver recruitment challenge that would provide more freight per driver.

Foster agrees: “Certainly we all need increased size and weight laws to be more productive in truck transportation, but it is a tough sell and one in which the general public does not understand the benefits. More education is needed there. I don't see it happening soon, but we all need to work hard on it.”

Low sulfur

Another example of regulations is a mandate slated for next year by the Environmental Protection Agency for ultra low sulfur diesel (ULSD).

“Major refiners have told us that bulk storage to retail distribution may well require dedicated tanks,” says Harvison. “If that comes to pass, petroleum carriers will have a couple of choices either to downgrade compartmented trailers just to handle ULSD or purchase clean bore equipment to transport the new diesel blend. In either case, it's a plus for the equipment sector.”

Another issue surrounds ways to prevent rollovers, which continue to plague the industry. “This is an immediate issue for the industry,” Harvison says. “We know that some manufacturers are addressing the problem with new technologies, but from what we've been told so far, such technologies are not available for retrofit.”

Anderson notes that new engine regulations for lowering emissions may influence whether carriers buy new tractors or new tank trailers. He also notes that braking distance rules are being considered.

Milk haulers

Baker points out that one issue that may come to fruition involves milk and other foodgrade haulers. Consideration is being given to requiring inspections on trailers from an outside entity after repairs are completed.

“This is similar as to what is now required on ASME vessels,” Baker adds. “This is really ridiculous. Of all the tanker industry, the last that needs any additional expense associated with their equipment is the milk hauler.”

Wayne Roderick of Acro Trailer Co says that should such a regulation be instituted, a 3-A approval would be voided any time a tank trailer changes hands.

“In order to regain 3-A approval, an outside inspector would have to inspect the tank and give approval,” Roderick says. “The inspectors, by the way, would not enter the tank to do their inspection. I have been in this business 42 years and have never found a way to inspect the inside of a tank from the outside.”

Cost for the process is estimated at about $800, he adds. “The regulation could be applied to a new tank that has never hauled a load, if it happened to be resold. On the other hand, a 30-year-old tank that has not changed ownership would retain its 3-A rating.

“Any shop that is capable of building or repairing a sanitary tank will have people capable of testing and certifying the tank. However, I do believe we need certified shops.”

In Canada, Paaren says that Canadian crude oil tanker specifications have put pressure on operators to retire marginal equipment and upgrade to new standards.

Pitts says that in New York and some areas of Canada new permit regulations are going to restrict the use of lift axles, requiring all axles to be steerable or tractable, which means an increase in trailer cost of several thousand dollars.

He also predicts that Canadian carriers will be ordering MC331 trailers that can be licensed in the United States.

Many factors

All of this is to say that despite recent growth and prosperity, there are many factors influencing the tank truck industry.

“There's one imponderable,” says Harvison. “Without a doubt, the tank truck sector has hitched a ride on the crest of the current economic boom. But, there's more. Tank truck carriers of all types and specialties have improved their marketing tools to the point that they've become an integral part of a given shipper's distribution process.

“To the extent that carriers can enhance this integration, the silliness surrounding bidding wars, reverse auctions, etc will dissipate, if not disappear, at least in the long term. “Yet another factor will be the continued escalation of world oil prices. At what point would either contingency prompt the domestic consumer to pull back on spending,” says Harvison. “Let's face it, the tank truck industry feeds on consumer spending for energy, food, and durables. Any hiccup in those numbers is not good news.”

Cannon voices concern about the migration of chemical production to foreign lands. “Only one new major chemical plant has been erected in the USA in the last decade although capacity has been increased at other existing chemical plants,” he says.

Steel costs

At the same time, manufacturers expect to face rising steel prices. “QT (quenched and tempered) steel keeps creeping up,” Pitts says.

About 90% of the heat-treated steel is provided by one company, which also means that there is little opportunity for price competition, he adds.

In other steel cost factors, manufacturers of shell plate now require minimum purchases in 20,000-pound lots when formerly the product could be ordered in 8,000-pound increments, another side to the rising prices.

Baker says there is no doubt the demand on steel products abroad has had a major impact on US manufacturers' rising costs. “We did investigate the possibility of purchasing some foreign-built inner shells just for comparison,” he adds. “But I'm pleased to say that the pricing was not all that attractive as compared to in-house cost.”

Terrorism fears

While manufacturing costs can be a headache for the industry, many remain concerned about the threat of terrorism in the United States.

“We need to improve security to keep us in the right direction,” O'Donell says.

Should the United States suffer another terrorist attack similar to the one in September 2001, Pitts predicts a strengthening of federal regulations for hazardous materials carriers. “They may change the way cargo tanks are designed in order to prevent access to the product,” he says.

“The great unknown would be the impact on transportation should the country experience another high magnitude/high visibility attack,” says Harvison.

“Forecasters have always relied on outs for unforeseen influences, but I believe everyone would agree that US business levels today can be significantly affected by international and domestic events literally overnight,” says Anderson. “The immediate nature and the potential magnitude of these unpredictable events is unprecedented in recent history.”

Despite variances

Despite the many variances in the market, the outlook for the industry appears bright, assuming there are no major gyrations in the marketplace.

“All in all, we look for solid demand for tank trailers for a number of years to come,” says Toja.

During the next few years, higher volumes of manufacturing activities are expected to boost demand for a variety of industrial chemicals and gases. Improving financial performances among the liquid food and beverage processors will facilitate the investment decision to replace aged equipment in certain fleets, he says.

“The expanding consumer sector will lead to greater demand for gasoline and motor oils while public construction growth and a revival in factory output spur growth for tars, waxes, and lubricants,” Toja adds. “Increased scrutiny and replacement of certain aged equipment involved in the transporting of industrial chemicals, gases, and liquid fertilizers will also support demand for new equipment, while the rapid growth in ethanol production will also boost demand for certain tank trailers.

“After a robust 29% increase to the level of 8,000 units this year, we look for tank trailer shipments of approximately 8,500 units in 2006.”

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