USA: Change on the horizon

From the November 2016 issue.

After a turbulent half decade, the US trailer market is now on track to readjust itself in line with the general economy. New regulation could soon cause the next disruption, though.

To adequately assess the performance of the US trailer market in 2016, it is necessary to take a step back and look at the big picture – at least if you believe Frank Maly, Director for CV Transportation Analysis & Research at ACT Research.

According to Maly, the US trailer industry has been on a “continual upswing” for the six years since the Great Recession, with 2015 shipments almost four times the level of 2009. That’s an all-time factory shipment record, with the total of almost 308,000 trailers just edging out the previous industry peak – a pinnacle that has been in place since 1999.

Such a long-term growth path is unusual for the North American commercial trailer market, he says, which has historically been “extremely cyclical” and closely tied to the economy at large. Equally unusual is that growth was not balanced across the full industry, but instead centred on the dry van and refrigerated van segment only – with one exception.

Maly says part of the post-recession growth resulted from energy sector strength, even though that short boom phase occurred early on in the decade. “Back then, energy sector investment triggered by a surge in hydraulic fracturing, or fracking, also supported vocational trailer production – including liquid tanks, bulk tanks and flatbeds,” he explains. “While the run-up in energy prices helped drive that growth, however, recent declines in energy prices have resulted in significantly lower volume for vocational equipment.

“Helping, but not completely filling the void, was improvement in residential construction and infrastructure development, which helped the dump trailer (tipper, ed.) market to recover and pushed the segment’s 2015 volume to the highest point since 2007.”

Also contributing to the extended, yet somewhat one-sided growth surge was the fact that most of the US market is driven by replacement demand, which is strongly dependent upon market conditions and closely tied to fleets’ financial performance. During the recession, replacement was significantly delayed – in fact, ACT data indicates that trailers in operation reached the oldest point in history – generating a strong need for equipment replacement when business picked up. “What’s more, strong freight demand helped freight rates grow a solid benefit to fleets’ bottom lines – the ideal breeding ground for extended growth, even though not very common,” Maly says.

According to the US-based expert, local fleets began to increase capacity all the way back in November 2011. That growth continued unabated until July 2016, which saw the first contraction in capacity in almost five years. “Less favourable freight rates and volumes have now resulted in a new reticence for fleets to invest, which manifested itself through weaker new trailer orders and increased cancellations.”

He adds, “Adding to market pressures, the capacity growth noted previously overshot the market, resulting in lower contract and spot freight rates. As a result, we see 2016 as a solid, but slightly weaker year than 2015. Weakness, however, is relative – if our current market projections come to pass, 2016 would still rank as the third best year in industry history.”

According to Maly, trailer OEMs have been stretched over the past few years, struggling for sufficient production to meet fleet demand. He says a particularly critical consideration for most was to balance overtime and build rates, with workforce burnout a frequently mentioned concern. A tight skilled labour market, causing difficulty in hiring additional staff, exacerbated the situation. 

“Two major factors resulted from those issues,” he explains. “With orders strongly outpacing available production, extended backlogs developed. We estimated the total industry backlog to build ratio to be at almost nine months at the close of 2015. In fact, there were indications some OEMs entered 2016 fully committed for the entire year.

“Secondly, tight production capacity has resulted in a capital investment surge by several OEMs. That additional production capacity will come mostly from new facilities rather than expansion of existing plants, with most coming on stream late in 2016 and into 2017. Now, a concern is that this additional capacity will face a weaker market.”

Maly says the US market may have reached a crossroads today where the role of the trailer as a mere commodity may have to be redefined – especially with view to a new set of Green House Gas (GHGII) regulations recently published by the country’s Environmental Protection Agency (EPA) and the Department of Transportation (DOT).

“For the first time, trailers come under efficiency and environmental impact consideration with the new regulations,” he explains. “While a trailer obviously has no engine – reefer trailers excepted – they are an integral part of the full truck/ trailer combination, and therefore the agencies state that as part of that vehicle, trailers can meaningfully impact both fuel efficiency and greenhouse gas generation.”

Major trailer categories addressed by the new regulations include dry vans, reefer vans, flatbeds, tank trailers, and container chassis, Maly summarises. “The new GHGII regulations have only been recently published, and are being closely reviewed by both OEMs and fleets at the moment. They will push trailer efficiency through the use of aerodynamic devices such as side skirts and so-called trailer “tails”, low rolling resistance tyres, tyre pressure monitoring or active inflation systems, as well as light weighting of the unit. That’s a momentous change of perspective.”

While GHGII regulations officially take effect starting in model year 2018, Maly says they will only “come into serious consideration” early in the next decade.

However, regulatory impact on the trailer market is certain to continue, with GHGIII allegedly already under development. As such, there could be ample movement in the US trailer market come 2020, and the traditional replacement pattern may continue to dissolve in light of legislative change. For now, Maly says the US trailer market is on track to readjust itself after a half-decade of extraordinary growth. “Transport equipment will become more efficient and capacity bottlenecks will resolve, but we believe the market may not be setting new records beyond 2016.”

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