WITH the US economy on track to grow by nearly 4% in 2004, trucking companies — including tank truck carriers — are reaping the benefits. Capacity has tightened, and rates are inching upward.
Truck freight likely will be one of the best performing aspects of the US economy, posting growth of nearly 4% this year, according to Martin Labbe, president of Martin Labbe Associates Inc. He discussed consumer demand and how it is benefiting the tank truck industry during his annual economic report and forecast, which was delivered at the National Tank Truck Carriers annual conference May 10-12 in Las Vegas, Nevada.
“Businesses have entered a phase of inventory building after about two years of liquidating,” he said. “Steady growth in consumer spending and strong growth in business investment, combined with building inventories will lead to healthy growth in freight shipments.”
The consumer gets much of the credit for firing up the economy and keeping the trucks rolling, Labbe said. Even at the height of the recent recession, consumers continued spending money, which kept the economy moving.
Why did consumers keep buying? Labbe pointed to several reasons: Low interest rates over the past several years spurred home refinancing and purchases of both new and existing homes. Employment levels remained relatively high throughout the recession.
In general, tank truck freight growth has outpaced overall freight growth and will continue to do so. Domestic travel and improving airline utilization will support strong petroleum demand. Manufacturing will grow faster than the rest of the economy, with chemical demand on the rise for all but automobile- and housing-related goods.
Since the fourth quarter of 2003, petroleum production has resumed its rate of growth prior to the recession, and demand should increase by around 2.7% a year through 2005. Resurgent industrial need for petroleum products should keep demand high.
Chemical production has surged due to all-time-high housing starts, low inventories, and resurgent manufacturing activity. Chemical production should continue to grow through the summer, according to Labbe. Chemical demand may slow a bit in the fall as residential construction eases. Overall chemical production for the year will be up by about 2.3%.
In the coming months, Labbe said he believes that unemployment rates will continue to fall slowly. Consumer confidence will stabilize and show some slight improvement, and consumer spending will be boosted by tax cuts that had a much bigger impact than critics predicted. Business investment will continue to rise because of the need to replace aging equipment.
All of this means plenty of opportunity for tank truck carriers, but Labbe had some words of caution. “You've got to know your costs and price freight according to activity, not volume,” he said. “Rates need to reflect the work you are doing.”
Tank truck carriers still face some serious challenges, including massive increases in operating costs and ever higher levels of security. These factors are helping to force as many as 5,000 carriers (15 or more power units) a year out of the industry, according to Labbe.
Some of the operating cost increases came from the new heavy-duty truck diesel engines that were mandated at the end of 2002. The switchover did not go well, and many fleets suffered from higher fuel and repair costs, related to the new engines.
The revised hours-of-service rules brought fresh productivity losses for many longhaul carriers at a time when they already were struggling to find enough drivers. The driver pool may shrink even further when mandatory background checks are implemented for those with hazmat endorsements.
Diesel prices are high and seem likely to rise through the summer. Middle East uncertainty will keep crude oil prices high. State fuel taxes also will continue climbing as state governments rebuild their coffers on the backs of truckers.
Insurance costs are still rising, but fleets should see some relief when equity values improve. Health insurance will experience double-digit increases for the next five years.
“Trucking isn't the major factor in higher insurance costs,” Labbe said. “It's everything else that is insured and exposed to catastrophic loss. Still, we can expect more bankruptcies because unscheduled and increasing insurance costs put carriers at risk.”