Steady demand seen in dry bulk, chemical tank leasing

THE leasing of dry bulk tanks, used primarily for plastic pellets, has picked up significantly in recent months, according to Matt Niemeier, national sales director for tank leasing and the tank sales division of Paragon Leasing.

“Our educated guess is the rail services are over capacity and a lot of product that would normally be hauled by rail has gone to the trucking side,” Niemeier said. “It’s primarily plastic pellets. That’s primarily what those trailers haul. We’ve sold a lot of those trailers in recent months as well, so our educated guess is that it’s due to more volume than rail can keep up with. It’s shifted to trucking.”

He said Paragon focuses on leasing general chemical tanks, insulated and non-insulated stainless steel tanks, and that part of the business has been “steady.”

“We’ve had pretty much a normal flow of lease trailers returned and new lease trailers going out,” he said. “We have grown the fleet this year. We’ve ordered some new trailers that are trickling out as business comes in. I don’t have anything exciting or drastic to tell you. It’s been pretty mundane in the fact that it’s been steady. The dry bulk side is doing really brisk. On the chemical side, I’m not saying it’s been bad—just boring.”

Niemeier said Paragon does not lease trailers that cater to the oilfield, though it does sell them. And although the demand for frac sand tanks has not stopped, he said purchases have been “cut down drastically the last two to three months” as the price of crude has plunged and some drilling rigs have shut down operation.

Oil prices

As of late March, the price of a barrel of West Texas Intermediate was $43.96 on the New York Mercantile Exchange—down more than 50% from a year ago. The number of active drilling rigs in the US had plunged 40% from March 2014, with some weeks featuring the shutdown of 50-60 rigs.

According to the US Energy Information Administration, that is the biggest drop in drilling since 2008, and is due largely to the oversupply of oil around the world that is driving the price down.

Going forward, Niemeier said he believes that the leasing outlook will be flat, with an increase in asphalt and cement trailers needed for the construction boom offsetting the downturn in the oilfield.

“I think other segments will be strong—construction will be strong,” he said. “We’ll have a really good year for asphalt trailers and cement trailers. But if you factor in the hit the oilfield side is going to take, the industry as a whole I think is going to be pretty flat. I think we will pick up in some areas that weren’t as good in recent years, but compared to the 2014 we had, with things serving the oil field, I think that’s going to bring the average down.”

Leasing demand for general chemical tank trailers and tank containers also remains strong, according to Steven Tapscott, Miller Transporters Inc. Miller Transporters and its Miller Intermodal Logistics Services Inc subsidiary offer a range of general chemical tank trailers and tank containers for lease.

“This is still a good market,” Tapscott says. “Our typical customer will lease equipment before buying. It helps moderate new trailer lead times that are currently around 90 days, which isn’t too bad. That is really a normal lead time. Overall demand for general chemical tanks is still very strong, especially for equipment going into product storage use.”

Leased trucks

Dennis Cooke, president of global fleet management solutions for Ryder System Inc, said the oilfield slowdown actually is helping the outlook on the tractor-leasing side.

“We’re seeing a lot of customers that are looking at reducing costs as a result and are looking for an alternative to doing maintenance themselves,” he said. “They do a total cost of ownership analysis and leasing shows up as an alternative they may not have looked at before. We see the oilfield slowdown has actually caused companies to look for savings in areas they wouldn’t have necessarily in the past.”

Cooke said the leasing market for trucks is very strong because of the complexities of the new EPA-driven technology.

“You have customers who are having sticker shock when they go to replace their older vehicles and also see the increase in maintenance costs along with the training required for the technicians and increased diagnostic costs, and so you’re seeing many customers who before wouldn’t consider leasing are now looking at it as a viable alternative,” he said.

“You start looking at what’s needed to prepare your shops to handle the new technology, vehicles, the diagnostics that are needed, the training that’s required. There’s quite an expense in that just to bring the technicians up to speed with the new technology—specifically the EGR and SCR technologies. There’s a large cost associated with that. If you’re technicians aren’t trained, it’s difficult to maintain the vehicles. We provide a benefit there. That’s our core competence.

“Then you get to uptime. We’re focused on our preventive maintenance program and maintaining low breakdowns and high uptime for our customers. Our belief is that when you PM the truck, you don’t want to see that truck again until the next PM. We’ve failed if we don’t achieve that. We strive for that at every one of our 800 shops. When you invest in the PM program, you get more uptime for your customers and everybody wins. It’s less costly for everyone as long as you focus on that PM process. That’s really the name of the game when it comes to quality and cost. Train your technicians on new technology, invest in diagnostics, and focus on the PM program so that your customer can run from PM to PM.”

Leasing advantages

He said the advantages of leasing start with acquisition costs. Since Ryder buys a large volume of trucks each year, there is an upfront purchase cost advantage it can utilize for its customers. And then it has over 800 shops in North America and 5000-plus technicians who can help to drive uptime for customers.

“The quality of maintenance across North America is seen and ultimately reflected in the uptime a customer has,” he said. “On the back end, when it’s time to turn the truck back in, you’ve got a residual value benefit where we take that risk off our customer’s plate, and we bear that risk, and we do have a higher residual value because we have around 50 retail maintenance used vehicle centers where we sell the truck at the back end.

“In addition, you’ve got a fuel benefit. We purchase in the neighborhood of three million gallons of fuel a year, so we’re able to provide a price benefit to customers on fuel. So you have a front-end purchase cost benefit, a maintenance benefit, and a back-end residual value benefit, and then you’ve got a fuel benefit also.”

Steady demand seen in dry bulk page 2...

He said that for those who want to maintain ownership, Ryder now provides on-demand maintenance in which customers can sign up for a given labor rate and parts costs and they can roll up to any one of the 800 facilities after signing an agreement on what their parts and labor rates are.

“As a result, we’re developing a relationship with customers we wouldn’t otherwise because they want to maintain ownership with their trucks,” he said. “That’s opening up that market of folks who want to maintain ownership, have their own shops, yet they do a lot of work outside their shops. We provide a nice alternative to them with a national footprint so they can get consistency of maintenance quality and consistency of pricing.”

Strong start

Overall nationally in the leasing sector, February was a very good month, with overall new business volume at $6.1 billion, up 13% from February 2014, and year-over-year business up 12%, according to the Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross section of the $903 billion equipment finance sector.

Receivables over 30 days were 1.1%, unchanged from the previous month and from the same period in 2014.  Charge-offs were at an all-time low of 0.2% for the 12th consecutive month. Credit approvals totaled 78.1% in February, down from 78.6% in January. Total headcount for equipment finance companies was up 3% year-over-year.

The Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) for March was 72.1, an increase from the February index of 66.3 and the highest level in four years. 

Said Brian Holland, president and CFO of Fleet Advantage LLC, “The results of the MLFI report and increase in year-over-year new business volume are reflective of our results and what we are seeing in the market. In the transportation sector, order volume for Class 8 trucks continues to be very robust, and newer technologies and government mandates are driving improved fuel economy. By leveraging flexible leasing solutions to acquire newer, more fuel-efficient equipment, fleet operators are able to capture significant operational savings and achieve the lowest cost of ownership. We continue to see increased optimism and confidence in this sector and maintain a positive outlook for 2015.”

The ELFA also revealed its Top 10 Equipment Acquisition Trends for 2015:

•  Investment in equipment and software will reach an all-time high in 2015. As the US economy continues to improve, business investment is forecast to reach a record $1.484 trillion in 2015. As business investment grows, demand for equipment financing will increase.

•  Businesses will invest in equipment not just to replace aging assets, but also to aid in expansion. The pent-up replacement demand that has driven equipment investment in previous years may be supplemented by long-awaited expansion investment as capacity utilization rates in some industries reach or surpass levels historically known to spur business investment. Industries poised for investment growth include oil and gas extraction, and transportation equipment manufacturing.

•  While some equipment types will see strong growth, others will moderate. In 2014, equipment and software investment increased 9.6% in Q2 and 9.3% in Q3. Looking ahead, growth in equipment and software investment is expected to moderate somewhat, as it is unlikely to keep up the strong pace seen in Q2 and Q3. A still healthy growth rate of 6% is forecast for 2015. Aircraft, trucks, and other industrial equipment are projected to be among the higher growth types, while agriculture, computers and software are expected to see slower growth.

•  Improving market conditions will continue to increase credit supply and demand for equipment acquisitions. As the economy steadily improves and business confidence continues to increase, credit standards should modestly loosen. The propensity to finance decreased in the wake of the financial crisis as businesses deleveraged and refrained from new business investment. Since bottoming out in 2010, the rate at which businesses finance their capital spending has grown consistently and will continue to increase in 2015 with steady economic recovery and shifts in Federal Reserve policy.

•  Eyes will be on short-term interest rate increases. Expectations for the Federal Reserve to raise short-term interest rates in 2015 should spur equipment investment as businesses seek to lock in equipment financing at lower rates. Despite rate increases, businesses will find that a highly competitive “buyer’s market” will continue to make financing an attractive option for acquiring equipment.

•  Businesses will use financing for a majority of their plant, equipment, and software expenditures. In 2015, 62% or $922 billion of investment in plant, equipment, and software in the United States is expected to be financed through loans, leases and lines of credit. A majority of businesses—seven out of 10—will use at least one form of financing to acquire equipment.

•  Advances in the use of technology will drive innovative financing options. Equipment finance providers are streamlining their business processes and improving customer self-service capabilities using digital technologies. At the same time, some end-users are moving away from traditional equipment consumption models and toward hosted or managed services based on usage rather than total ownership. To meet customer demand and address evolving technology equipment requirements, equipment finance companies will tailor innovative financial offerings.

•  Several “wild cards” could impact equipment acquisition decisions. In what could be a breakout year for the US economy, positive and negative external risks could affect equipment investment. Potential political gridlock, global economic weakness and geopolitical risks could be a drag on investment decisions, but GDP growth from low oil prices, a potential surge in the housing sector and sufficient capacity utilization could have firms ramping up capital expenditures.

•  Nontraditional financing will continue to grow and play a larger role in the equipment finance industry. As regulatory scrutiny increases and some banks’ lending standards tighten for certain credits, nontraditional financing sources, such as investment bankers, venture capitalists, insurance companies, crowd funders and others, are exploring opportunities in the equipment finance sector.

•  A final lease accounting standard will be released. The Financial Accounting Standards Board and the International Accounting Standards Board continue to work on the lease accounting project, which will change how leases are accounted for on corporate balance sheets. A final standard is anticipated in 2015, with a possible effective date of 2018 or later. The good news is that the benefits of leasing equipment will remain intact despite the lease accounting proposal. ♦

TAGS: Trucks
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