NTTC Annual Conference Good Economy Prompts Rejection Of Some Low-Profit Tank Loads

CORE tank truck carriers for some chemical companies reportedly have begun refusing to haul additional freight at current contract rates. As a result, shippers are having to shop around for extra carriers.

Not surprisingly, rates seem to have firmed. There is very little downward pressure on rates at this time. However, heavy equipment purchases continue, and this could prompt another round of rate cutting in the future.

These were some of the industry snapshots served up during the annual economic review of the tank truck industry by Martin Labbe, president of Martin Labbe Associates. He spoke May 17 during the National Tank Truck Carriers 51st Annual Conference in Atlanta, Georgia.

Overall, the US economy remains fundamentally strong, and the outlook for tank truck carriers is good. Shipments and consumer spending remain strong. Nonresidential investment is growing, and road construction is increasing.

Labbe predicted that the US economy will continue to expand for the next six to eight quarters, and there is little likelihood of a recession. Gross domestic product should grow by about 4.1% this year, up from 3.9% in 1998. Consumption should increase by about 5.3%, which is better than the 4.9% recorded last year.

Capacity utilization will be about the same as last year at 80.2%, and inventory levels remain small. Unit labor costs are not increasing, and inflation is muted.

The only economic negatives are on the export side, but Labbe predicted that the worst of the recession-related export declines had passed. "It's not going to get much worse," he said. "For instance, I don't believe we will see a devaluation of the Chinese currency."

Mexico has taken steps to ensure economic stability as its 2000 presidential election approaches. Improvements in petroleum prices have given the Mexican economy an upward bounce, Labbe said. Brazil is turning the corner on its economic problems.

Chemical manufacturers have been among the hardest hit by the international economic troubles, and first quarter chemical production was down 0.9%. However, that's less than the 8.6% and 1.7% declines for the last two quarters of 1998. Petroleum production increased by 11.2% in the first quarter of 1999. Plastics were up 4.8%, and food production increased 4.9%.

Despite the declines in the early part of the year, Labbe said he expected chemical production to grow overall by about 1.2% in 1999, compared with 0.5% for 1998. Refined petroleum production should increase by around 3.3%, and plastics production should grow by 2.8%.

Some of the best growth rates will be found in construction materials. For instance, bulk cement production should rise by nearly 7%, compared with 6.3% last year. Production of paving and roofing materials such as asphalt should be up 7.6%, following a 7.1% rise in 1998.

The strong economy has encouraged trucking companies of all types to continue buying tractors and trailers at record levels. Labbe said 225,000 to 260,000 Class 8 trucks will be built in 1999. "I'm concerned that too much equipment is being put on the road," he added. For the time being, equipment utilization rates are high. While capacity is not as tight as it was in 1998, many fleets still have trouble finding enough qualified drivers to keep the vehicles rolling.

The driver shortage is one of the factors contributing to the wave of consolidation that has run through the tank truck industry. Consolidation will continue, according to Labbe.

Other worrisome issues in the industry include poor profit margins and high operating ratios for many carriers. Operating ratios for the third and fourth quarters of 1998 averaged 94.72% and 95.97% respectively. Ratios for the first quarter of 1999 are worse, according to Labbe.

Net profit margins fell from 4.13% in the third quarter of 1998 to 2.45% in the fourth quarter. Poor performance continued into 1999. In many cases, profit improvement is coming only from cost containment, Labbe said.

Improving profitability will be difficult for a number of reasons. Carriers are likely to face higher taxes because the federal government is requiring a higher percentage of state matching funds for highway construction projects.

More roadside inspections will be conducted as a result of increased enforcement efforts by the Federal Highway Administration. New hours of service rules are likely, and productivity could take a hit.