Housing downturn, economy quivers stir conservative outlook
Oct 1, 2007 12:00 PM, By Mary Davis
This Time last year the cargo tank manufacturing industry was speeding along as it tried to keep up with orders for new tank trailers (particularly vehicles for petroleum products) and generally enjoying an upsurge in the market.
Today, the petroleum side of the business remains steady, but as Wall Street reacts to a restless US economy and the sub-prime mortgage sector agitates confidence, industry spokesmen report that their companies are experiencing a few speed bumps in the road and voicing a more conservative outlook over the coming months.
When Bulk Transporter contacted those-in-the-know in late summer and early fall, the housing industry was causing reverberations throughout the construction sector. The Portland Cement Association (PCA) reported in mid-September that rapidly deteriorating economic conditions, caused primarily by the sub-prime crisis, had prompted the association to adjust its forecast for 2007 and 2008 cement consumption.
Ed Sullivan, PCA chief economist, said 2007 cement consumption is expected to decline 6.8 percent, followed by a 1.8 percent decline in 2008. Those projections came despite point cuts in the federal fund rates, as well as anticipated cuts later this year and in early 2008.
“Right now the sub-prime crisis is viewed as an issue for the residential sector,” said Sullivan in a news release. “We believe that it will spill over into commercial lending, hindering nonresidential construction activity. Additionally, high inventory conditions in the residential market will suppress that sector and slow down recovery efforts.”
At the National Tank Truck Carriers (NTTC), John Conley, association president, offered some positive comments about the situation. “The old adage is that the tank truck industry is the first to see signs of a recession and the first to see signs of a recovery. I have not heard of any clear signs that loads are off significantly enough to portend a recession. We do hear of regional ups and downs in some products, but nothing that should lead to pushing the panic button.”
Those comments coincide with what is being heard from the manufacturing side of the industry. Says Dan Jarboe at Beall Corp: “Market conditions have changed from last year at this time. The petroleum side of the business is as busy as last year, but the pneumatic dry bulk side is slower.
“The housing market slow down has had a real effect on the pneumatic side of our business. California has over 30 million people and when they slow down, we really feel the pinch. We are hoping that the housing market will begin to get back on its feet by next year at this time. I really don't see any substantial improvement in the housing market for at least a year, maybe 18 months.”
John Cannon at Brenner Tank LLC agrees the housing market plays a starring role in the industry because many chemicals, among other products, that are transported in cargo tanks eventually go into products for home construction and remodeling. “However, several other positives, such as the continued growth of biofuel production and the increased harvesting of North American crude oil, more than counterbalance the drag of the housing sector for the cargo tank industry,” he says.
At Heil Trailer International, Bill Harris says new-order activity in the petroleum and crude oil sectors are proving to be more energetic than even the previous year. “Unfortunately, the housing market has slowed the dry bulk business somewhat,” Harris adds. “Specifically, low-cube trailers that haul cement and pulverants that support the construction industry have softened. On the other hand, large-cube dry bulk trailers remain on par with normal historical trends for this time of year.”
Cannon points out that cargo tank demand, after demonstrating robust behavior in the first six months of 2007, seemed to stall in the summer months. “The summer stall could be partially attributable to the typical seasonal slowdown,” Cannon says. “However, the peaking cost for stainless steels, and other metals, probably was the most significant cause.”
Mark Hunsley at Polar Tank Trailer LLC notes that for the past few years carriers were holding on to their older stainless steel trailers because of their value, but today they seem to be more likely to trade them when they purchase new trailers. As a result, used trailers are becoming more available than previously.
Earlier this year at the NTTC annual conference, Martin Labbe of Martin Labbe Associates said that although the economy may be sluggish, that doesn't mean recession. He pointed out at the time that there was a tightening of credit in the housing market, as well as declining profits and increasing commodity prices.
His comments were accurate projections for the economic situation that continued into the summer. Nevertheless, Labbe predicted an overall growth rate of around 2% for the year and said slower growth should be seen in a positive light.
Lanny Wilhelm has his finger on the pulse of the industry, serving both as chairman of NTTC and also president of Liquid Transport Corp. He says that from the carriers' viewpoint, the tank truck sector is “rolling along fairly stable this year. We did see a bit of a slowdown during the first quarter of 2007. However, the third quarter picked up, and business is very good in selected markets.”
Although lending institutions are playing hard-to-get in the housing sector, Wilhelm says banks look more favorably on tank truck carriers. “Banks and finance companies are still very aggressive and active in the marketplace with regards to rolling stock. In the long term, we believe interest rates will rise. But in the short term, as money moves from the stock market, due to its volatility, into treasuries, interest rates should go down.”
In late summer the industry was facing a stock market that resembled a roller coaster ride at Disneyland with none of the accompanying thrills.
Wall Street's behavior is likely to affect consumer confidence, as well as fleet profitability, says Harris. “The first drives the requirement for freight and fuel, and the second drives the need to replace trailers and grow the fleet. If the economy can sustain its current growth rate, or better yet improve, fleets will continue to replace trailers and grow their businesses.”
Jarboe says he isn't sure how stock market volatility will affect customers' confidence level. “However, I would think that unless we see something quite different from what we have recently seen, our market conditions will not be adversely affected.”
Wilhelm agrees with those assessments, saying, “We've been through several years at the top of the economic cycle. Right now, we are experiencing a correction of about 10%. We believe the market will rebound some and business should remain fairly stable.”
Cannon points out that many products hauled in cargo tanks, particularly foods and fuels, will be transported in essentially equal or rising quantities despite what happens in the stock market over time. “We don't expect any meaningful correlation between the stock market and our cargo tank industry will evolve,” he says.
Mike O'Donell at Stuart Tank Sales Corp agrees that an up-and-down stock market isn't likely to damage the tank truck sector, unless it should take a severe slide and remain there for a considerable length of time.
Hunsley agrees, saying, “I don't think the stock market affects us directly. We are far enough removed, that I don't think the stock market has a significant effect on us, unless of course, the overall economy begins to be impacted.”
At Mississippi Tank, cargo tank production means MC331 tank trailers and bobtails. Mike Pitts says that sector of the business is not driven by stock market influences as much as by the global propane supply. “Everything is global now and that has changed the market,” he adds.
The propane market has not exhibited record-setting statistics in the past year, but it has produced one of the better 12 months recently, Pitts says. “It has been good enough that our sales are out to May to June of next year. The bobtail business is good. The trailer business is driven by a growing market, partly thanks to the National Propane Gas Association PERC (Propane Education and Research Council) funds promoting products.”
With the introduction of improved propane injection systems, propane-fueled vehicles are becoming more popular, which also helps propel the market, Pitts adds.
In addition to the Wall Street effect, the industry has to adapt to the cost of products used in tank trailer manufacturing. Stainless steel costs drove the price of new trailers to a peak in the summer, says O'Donell. “We are finally seeing some tapering off on stainless pricing starting in August — and we feel this will continue until the end of the year at least, and hopefully beyond into 2008.”
Aluminum prices have been increasing for the past two years, Jarboe points out. “I don't see any price reductions in aluminum in the near future. While the price of steel has increased, it has been surpassed by the large increases in aluminum. I think the price will continue to climb, but at a slower pace than what we have seen over the past 12 months.”
Even if raw material prices weren't high enough, more challenges occur in the availability of the product. Construction booms in China and India and growth in other parts of the world have increased competition for steel supplies. To contend with the situation, companies that can order large quantities at a time have a better chance of success.
Pitts says: “Steel is really hard to get. For quenched and tempered steel (QT), we also are pretty much down to one source in the United States. We also have a few foreign sources.
“The steel price last year saw a little bit of moderation because surcharges went down, then the steel companies adjusted the base price and we were back where we had been. But, nickel content is what really pushes the price up. We're hoping to see the price of nickel level off.”
Cannon takes an optimistic view where steel availability is concerned for Brenner Tank. “Steel availability has not been an issue for our company for the past decade, and we expect the same supply situation in the future, barring any unforeseen developments,” he says. “We believe stainless steel costs peaked in the summer of 2007, and will level out later this year, albeit at figures significantly above what the cargo tank industry enjoyed in 2003.
“Furthermore, alternative materials, such as Lean Duplex (the family of duplex stainless steels generally has more chromium, but less nickel than type 316L steel) that Brenner brought to the market in 2007, will serve as effective hedges against unnatural escalations for 316L that we endured over the past 12 months.”
Turning attention to north of the border, Daniel Tremblay at Tremcar Inc says: “”Everybody has been pretty busy in the last 12 months. We now see much shorter backlogs, especially on stainless products. Dry bulk, mostly for cement service, has been slower and slower each month, probably due to construction market softening. Plastic service seems a little bit slow also, probably due to more manufactured goods being made in Asia and exported to North America.”
He points out that the petroleum industry in Canada remains strong with ethanol providing a significant boost. “However, the scariest part is if the common customers have less money in their pocket to spend on consumer products,” he adds. “Two-thirds of the North American economy is based on consumption. If consumer spending goes down, all the economy will follow.”
As for the steel situation, he reported nickel, copper, zinc, lead, and chromium prices at record highs. “I think this year will be a quiet year,” he says. “Stainless steel pricing should be leveling for the next year. Aluminum is decreasing now that China is a net exporter. This puts pressure on pricing. Availability of both products is easier than the last three years.”
Denis Marcus at Comptank Corp in Ontario, Canada, reports that his company's fiberglass reinforced plastics (FRP) tank trailer business has orders into February 2008. In addition, he has customers with standing orders for one a month throughout 2008. “The market is good, at least for what we are doing,” Marcus adds. “We're very happy with how sales are going.”
Comptank has begun supplying 3,000-gallon tanks to be mounted on truck chassis, a new product for the company in addition to its transport manufacturing. Marcus also says that carriers have begun to look more favorably on FRP tank trailers in general. “It has finally made its mark,” he adds.
However, he points out that while the price of steel doesn't greatly impact his business because of the vehicles' type of construction, the cost of resin, a major component of the tank, has risen at least 30% in the last two years and isn't expected to subside any time soon.
And so we return to the United States, the future, and what is in store for the tank truck industry in 2008. O'Donell is predicting strong growth for next year, but he does voice some concerns about the nation's security and its relationship to a stable economy. “If we can control cost and continue to head off any terrorist attacks, we feel the next 12 months will continue to have good growth.”
Cannon predicts a return to normal tank demand levels in the next several months, primarily because of the continuing decrease in metals costs. “However, we understand that carriers and other purchasers of cargo tanks are confronted with several cost challenges associated with fuel, drivers, and tractors that may conspire to temper near- and mid-term demand for new cargo tanks.”
At Beall Corp, managers are in the process of establishing market goals for 2008. “I'm guessing that due to the slowness of the pneumatic side and the strength of the petroleum side of the business, we will be at about the same volume as 2007,” says Jarboe.
Harris adds that Heil is re-aligning its resources to better meet the demand expected in 2008 for petroleum and crude oil tank trailers.
Next year continues to look promising for Mississippi Tank, says Pitts. “Indicators suggest that our economy is possibly poised to take a turn. If it turns down, I expect a little bit of a change. More downturn in the home mortgage business could stymie construction of new propane heated homes. We're watching that market and will see if there is an effect on both trailers and bobtails. However, the bobtail market can be up while the transport market is down, depending on what's happening because their uses are different.”
Driving the overall tank trailer manufacturing market are the carriers whose bottom lines determine whether they will be making vehicle purchases. Wilhelm's crystal ball is predicting aluminum and stainless steel tank trailer sales strong in 2008. “We are seeing fleets that have stayed on the sidelines this year, due to the high cost of stainless steel, but now they are starting to place additional trailer orders. Although there is a large amount of used equipment on the market now, those used trailers are selling for pretty high prices.
“We believe the asphalt business will continue to be very busy and the chemical markets will experience moderate growth. Private equity groups continue to purchase some of the larger chemical companies, and this trend should remain strong going into 2008.”
Hunsley points out that the industry's profitability should remain positive. “To that end, the carriers will be able to afford new trailers and to repair older ones,” he says. “The industry has done a good job of capacity equal to demand, and the rate structure has remained strong.”
However, Wilhelm points out the problems that continue to plague carriers, particularly driver recruitment and retention. “Our industry will go into next year still faced with one of our biggest challenges,” he says. “This problem will not improve until the trucking industry can offer drivers a much higher level of compensation. We have made progress, but pay for tank truck drivers is still too low for the demands and training they must have in order to perform their duties.”
Conley notes that carriers continue to be frustrated by political issues involving hours-of-service regulations. Rules established by the Federal Motor Carrier Safety Administration have been challenged by several advocacy groups, resulting in an unsure future for how drivers will be regulated.
“This factor hovers over our industry at the time of this interview with Bulk Transporter,” Conley says. “The hours-of-service situation is a mess. The tank truck industry already faces a challenge finding high quality drivers demanded by our carriers and shippers. If we throw in an artificial court-mandated 10% reduction in driver productivity, we will need more drivers and might well need more equipment to handle the same amount of loads. Drivers must think those of us in Washington are nuts, and I would find it hard to argue with them.”
Washington DC also dominates the picture as politicians gear up for the 2008 federal elections, which could bode well for the tank truck industry, Conley says. “We will pick a new president, a new House of Representatives, and one-third of a new Senate,” he notes. “Incumbent politicians do not want voters to feel any pain during an election year. They will find a way to put off problems, real or imagined.
“Meanwhile, the food and petroleum sectors of our diverse industry are the most stable over time. The chemical industry and our plastics haulers are more susceptible to consumer confidence swings. We seem to have talked our way into another crisis in the housing market, though how much of our population is really in the market to buy a new house? As long as unemployment stays low, people will buy the products our carriers help to produce.”
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