Onward & Up: 2006 pre-buy significantly bigger than ’02, says analyst

TORONTO — There’s no longer any question the North American trucking industry is in full-swing, heavy-duty pre-buy mode.

The general consensus is that North American truck sales will top 340,000 in 2006, before a 30-percent drop to just over 220,000 in ’07 — when the next round of Environmental Protection Agency low emission engine rules take effect.

The 2006 pre-buy is in full swing, but on schedule
for an abrupt stop very soon

Just as in 2002, when the EPA mandated the first phase of pollution cuts, carriers — mostly large ones — have begun stocking up on existing equipment to avoid buying the new engines after the Jan. 1, 2007 deadline. All diesel engines will have cut particulate matter by 90 percent of 2004 levels. Enginemakers — including Cat, which uses its proprietary ACERT technology instead of exhaust gas recirculation (EGR) — have added diesel particulate filters (DPF) to meet this standard.

Total class 8 sales in the U.S. alone reached close to 26,000 in March, a 27 percent jump over the same month last year. According to respected investment firm Bear Stearns, preliminary class 8 net orders in North America hit another all time high last month of 49,900. Even the more volatile medium-duty market looked solid, with new class 5-7 orders for March at 35,500 — 24 percent better than the all-time high of 28,666. (Read more in today’s other online story “March Class 8, MD, orders break more records.”

“There is certainly a sense of urgency to get it while you can,” Peter Nesvold, transportation analyst with Bear Stearns, told Today’s Trucking recently.

Despite predictions a year ago that the ’06 pre-buy would be softer than the first one in early 2002, Nesvold says it’s looking as if this year’s surging sales are significantly more affected by pre-buying than last time around. “The concerns were bigger in ’02 as it pertained to the uncertainness of [EGR] technology. From a pure engine technology view, ’07 isn’t too big a deal,” he says. “But there are several new, growing concerns.”

Among the issues that might be scaring buyers off of ’07 equipment are: Lateness in getting new engines out into the field for testing; new diesel particulate filters in the engines and cleaning intervals in soot traps; the eyebrow-raising $7,000-$10,000 higher sticker price most OEMs have announced would be slapped on new trucks; and, the murkiness of the costs, availability, and fuel economy penalty of ultra low sulfur diesel (ULSD), which must be used with the new engines.

This chart produced by Bear Stearns shows orders may be
headed for a wall in the next couple months

“When you look at it from those perspectives, and when you consider the number of trucks bought, I think it shows [the pre-buy] is much bigger than expected,” says Nesvold. “In ’02, orders peaked at around [monthly] 30,000. If it wasn’t for the pre-buy, I don’t see how we could possibly sell 350,000 trucks this year.”

However, with a robust economy, less competition, and more freight demand, couldn’t a large fraction of new sales be linked to expanding capacity?

Nesvold doesn’t believe so — at least he doesn’t lend the theory too much weight. He says orders go beyond economically derived demand. Many large carriers seem to be trading in or selling vehicles directly in the used truck market at a similar ratio they’re taking delivery of new ones. Therefore, the purchases are mostly replacement — at an accelerated rate.

That bodes well for smaller fleets and owner-ops not able to buy new — either because of price or lack of influence at the OEM level — and are hunting for newer, low-mileage pre-owned equipment. Used truck and leasing companies are bullish for the rest of 2006 and, unlike OEMs, well into next year as well.

“With OEMs stating that they will be built out of manufacturing capacity for the year by this spring, this has within the last three weeks caused more activity and demand for quality trucks,” says Frank Oliveira, vice-president of Arrow Truck Sales Canada. “Customers are coming in and talking about getting into units now before the selection is diminished greatly later on.”

While some of Canada’s largest fleets admit to pre-buying, the phenomenon overall isn’t as pronounced north of the border as smaller fleets (only about 10 in the country top 1,000 of their own tractors) are generally more likely to honor slightly longer, targeted trade cycles.

For many fleets like H&R Transport in Lethbridge, Alta., the timing for buying just isn’t right. Darcy Foder, senior vice-president of the 440-truck, temperature control carrier, says the issues surrounding ’07 aren’t grave enough to bait him into trading in trucks prematurely.

“We’re not going to accelerate our current tractor-trade cycle as it relates to the ’07 engines,” he says in an interview. “We just feel the extra costs in retiring the tractors as well as getting those trucks in return conditions is just too disruptive to our shop staff and operations.”

Foder, whose fleet is about 1.5 years old — mostly made up of Kenworths and Freightliners with a 50-50 Cummins-Detroit Diesel split — says he’s concerned with the new trucks’ price tag and ULSD, but figures he’ll have little choice but to deal with those issues at his next purchase cycle in another year and a half.

By then, of course, all the chatter will be on the impending pre-buy to avoid the confusion surrounding tough 2010 engine standards. At that point an extra 10,000 bucks a truck might seem like a sweet deal.

Read more of this story in the current April issue of Today’s Trucking.