Economy looking strong for tank truck carrier sector

TANK truck carriers are outpacing the rest of the trucking industry, according to Bob Costello, chief economist for the American Trucking Associations. Tank truck operations should continue to improve through the rest of this year.

In fact, tank truck activity is up around 20%, and the sector is in full economic recovery. “You guys are doing the best of anyone in the trucking industry, and I'm very happy to be here today to deliver that news,” Costello said.

He delivered that optimistic economic assessment May 23 during the National Tank Truck Carriers 63rd Annual Conference in Baltimore, Maryland. In addition to Costello, other speakers giving upbeat economic reports included Kevin Sterling, senior vice-president at BB&T Capital Markets, and Dennis Slagle, president and chief executive officer of Mack Trucks Inc.

Tank truck carriers are benefiting from a number of positive economic factors, including rising industrial production. Recent projections forecast industrial production growth of 6.5% this year, 4.7% in 2012, and 3.1% in 2013.

Bulk cargoes

Plastics production should grow by about 5% this year, and chemicals should be up about 4.5%. Plastics output should continue to grow through 2013, which means plenty of business for tank truck carriers.

Chemical production has rebounded nicely after bottoming out in 2009. Costello predicted chemical production growth of around 4.5% this year, 3.2% in 2012, and 2.1% in 2013.

Food shipments should grow by around 6% over the next three years. This is about normal for the food sector, according to Costello.

More people are working, and payrolls are coming back. “The employment picture isn't great yet, but it is pretty good right now,” Costello said. “The US economy has recovered about 20% of lost jobs, and we are creating jobs in the private sector. On the downside, the Great Recession brought the largest wage decrease the US has seen since the Great Depression. The upside is that has helped keep inflation down.”

Economic issues

Despite many positives, a number of negatives still impact the US economy overall. Topping the list is construction, particularly housing. Housing starts remain well below the last seven recession cycles, and too many homes are on the market. “I don't believe the housing market will pick up before 2014 at the earliest,” Costello said.

Capacity remains tight in the tank truck sector, as well as across much of trucking in general. The overall industry is 13% smaller than it was before the recession.

“Little, if any new capacity is coming on-line,” Costello said. “Government regulations have — or will — limit capacity in the future. The driver shortage will get worse. Barriers to entry into the trucking industry are rising, and that will continue. There is nothing to suggest that a significant amount of new supply will enter the industry anytime soon.”

Sterling agreed that freight transport capacity will continue to tighten. Many shippers are now focused on making sure they have enough transportation capacity to meet their needs, and are not as concerned with reducing rates.

For shippers, as well as carriers, the driver shortage is becoming a key issue. The traditional truck driver source — white males aged 35 to 54 — shrank by three million over the past decade. Wages at for-hire carriers remain too low. Sterling pointed out that annual driver pay at private fleets averages $64,000.

“Driver pay needs to rise,” he said. “You have to take care of your drivers or they will continue to leave the industry. This goes for shippers and carriers. In fact, shippers need to monitor driver turnover for the carriers they use.”

Even without the driver shortage, the trucking industry in general is shrinking. Fleet acquisitions are on the rise. “As the economy continues to improve, merger-and-acquisition activity is expected to pick up significantly,” Sterling said. “Private equity groups have amassed more than $480 billion, and they are looking for companies that performed well during the recession.”

Many of the trucking industry acquisitions over the last several years involved distressed carriers selling at discounted valuations. However, certain carriers have been able to command higher valuations based on strategically attractive business model characteristics, such as contractual revenue base, specialized equipment, and dedicated routes. Tank truck carriers have been among those benefiting from higher valuations.

Troubled fleets that can't find buyers are shutting down. More than 1,400 US carriers went bankrupt through the third quarter of 2010, and carriers are continuing to fail. Operating ratios remain too high across much of the industry.

The truckload tractor fleet (eight years old or newer) has shrunk 16% — roughly 252,000 units — and is expected to grow by just 1.6% this year. The tractor fleet 15 year old or newer has dropped 12% and is projected to shrink another 0.6% in 2011. Tractor growth in the trucking industry trailed gross domestic product six of the last eight years.

Equipment cost

Part of the problem is the cost of the equipment. Tractors purchased today are $37,000 more expensive than they were in 2001, according to Sterling. Depreciation costs are rising even as revenue miles are recovering.

Maintenance costs are becoming a real pressure point for truck fleets. Thousands of carriers have operating ratios in the 97% to 102%, and vehicle maintenance costs are becoming ominous for them.

“By the time they get operating ratios back in the 94-ish range, where they have money for reinvestment, it could be too late,” Sterling said. “On top of that, CSA (FMCSA's Compliance, Safety, Accountability program; EOBRs (electronic on-board recorders); and HOS (hours of service) will raise operating costs even higher.”

Vehicle outlook

Slagle agreed that the trucking industry has a serious issue with aging equipment. He said most of the truck buying right now is for replacement. Very few new truck purchases are going to fleet expansion.

Still, truck orders are strengthening, and manufacturers should build 230,000 to 240,000 Class 8 trucks for the North American market this year. “Orders were up approximately 193% for the first four months of 2011, compared with the same period in 2010,” Slagle said.

Truck manufacturers are helping to stimulate sales by turning out a very good product. “The 2010 engine technology has been very well accepted in the market, and we now provide our customers with some of the cleanest engines in the world,” he said.

Fuel economy for Mack and Volvo engines is up 8%, according to Slagle. The engines produce higher horsepower and are performing well. They are building a great uptime record. Diesel exhaust fluid (DEF) availability was a non-issue.

“There is plenty of DEF on the market, and prices are coming down,” he said. “Further, bulk shipments of DEF mean more business for tank truck carriers.”

Tank trailer production also is growing, Theodore J Fick, president and chief executive officer of Polar Corporation, said in an interview with Bulk Transporter. He estimates that the industry will build around 8,900 tank trailers this year and 9,900 in 2012.

Perhaps two-thirds of the production will be liquid cargo tanks, with petroleum accounting for a third of that. A significant number of the cargo tanks will be for fleet expansion especially for carriers involved in oil and gas production operations.

“The oilfield sector is booming right now for tank trailer manufacturers,” Fick said. “Oilfield orders have largely replaced dry bulk business lost when the construction market dried up. Customers want 1,000-cu-ft dry bulk trailers for frac sand. They are also buying stainless steel chemical tank trailers and aluminum vacuum trailers.”  ♦

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