Tractors and trailers are facing the same issues, as 2020 equipment orders and sales inch along — namely there are too many of them. Whether it is medium-duty trucks, Class 8 tractors, or trailers of nearly every kind, the red-hot equipment ordering cycle of 2018 is now creating a hangover into 2020 with too much new inventory and too few orders, and that is helping drive down the used truck market as well.
If you are an owner-operator or a small fleet weathering the current rate environment and looking for late-model equipment, now may be a good time to buy. For everyone else, it may be time to look ahead to 2021.
Speakers at the ACT Research Seminar 62 in Columbus, Indiana, on Wednesday all sang the same tune — equipment orders and sales are not great, but they aren’t that bad either. The problem across all segments — Class 8, medium-duty, used trucks and trailers — is that freight volumes and rates were so good in 2018 and early 2019 that fleets ramped up orders and manufacturers ramped up production, leaving the industry with an oversupply after consecutive years of record production. As production and sales levels return to more normal replacement cycles, the resulting impression is one of doom and gloom. It’s not quite that bad.
Class 8 forecast
Good times never last, and that is true with Class 8 vehicle production.
“For all of you that manufacture stuff, 2020 is going to be a grind,” said Kenny Vieth, president and senior analyst of ACT Research. “Because truckers bought a lot of trucks in 2018 and 2019, there is excess capacity.”
Vieth estimates the industry added 13% “active” capacity from early 2018 through the end of 2019. “That’s a lot of trucks brought online in a very short period of time,” he said, noting that 2020 will be “primarily rebalancing” of inventory.
Vieth said orders fell throughout 2019 but that production and sales did not start to respond until the fourth quarter of 2019, which is why the rebalancing is just starting.
Total Class 8 truck builds in 2018 were 324,500 units. That rose to 342,500 in 2019, but Vieth expects it to drop to 224,500 in 2020 and 239,400 in 2021 before rebounding to 288,000 in 2022 and 339,800 in 2023. Replacement demand is about 200,000 units annually, he said.
In early 2019, ACT forecast 335,000 Class 8 truck orders for that year, with the number falling to 243,000 in 2020. The estimated number of trucks waiting to be built at the end of 2019 was about 123,000 compared with 297,000 in December 2018.
Like the Class 8 market, the medium-duty market, defined by ACT as Classes 4-7, is slowing.
“We need to see inventory rationalized in 2020, Vieth said, noting that the segment should still see “moderate growth” in 2020.
Net orders declined each month in 2019 and finished the year down 20% over 2018. Retail sales were a bit better, improving slightly over 2018’s number to reach 300,000 units, which includes trucks, buses and RVs. Trucks rose to 241,886 units from 224,494 but will moderate over the next two years to 233,700 in 2020 and 233,500 in 2021, according to ACT.
Class 6-7 vehicles, which make up about 55% of the medium-duty market, jumped from 155,141 units in 2018 to 174,927 units in 2019. Class 5 vehicles saw a large jump as well, rising from 84,841 in 2018 to 98,388 in 2019. In 1998, only about 3,000 Class 5 vehicles were sold per year.
About 75,000 Class 4-5 vehicles and 150,000 Class 6-7 vehicles are currently needed for replacement cycles. Overall, 950,000 Class 4-5 vehicles with an average age of 5.7 years are on the roadways, as are 1.4 million Class 6-7 vehicles with an average age of 5.9 years. Both segments continue to grow and the average age continues to fall.
The story is the same on the trailer side of the equation. Following nine straight months of order declines, October provided a glimmer of hope for trailers, with 31,900 unit net orders placed that month, ACT said.
“We had an October head fake,” said Frank Maly, ACT Research director of CV transportation and analysis. “We had some strength, but it went away.”
Orders have been negative year-over-year for 13 consecutive months, he said, and cancellations have risen. In response, production has begun to slip, even though there has been an inventory drawdown that has lowered the backlog to less than half of what it was a year ago. The backlog is now at 105,773 units, seasonally adjusted, representing about five months of build at current rates.
“If the backlog continues to fall, that means we’re building more than we’re selling; we still haven’t found a balance,” he said.
The nation’s trailer fleet is as young as it’s ever been, with the average age sitting at about 6.5 years, down from almost 9 in 2010.
Last year set an all-time record for trailer production, Maly said, at 339,000 units. This year, that number is expected to drop to around 239,000, then to 242,000 in 2021. Both numbers, Maly noted, are returning to normal, but after consecutive record years, it just doesn’t seem that way.
Used truck forecast
Following strong new truck sales in 2018 and early 2019, the used market has become inundated with inventory, and that is being reflected in prices, which have dropped. In December, the average price of a used Class 8 tractor fell 4% month-over-month, while average miles were up 4%. On a year-over-year basis, the price was off 22% and miles up 9%. The average age of a Class 8 vehicle in December was 7.2 years, with 475,250 miles.
The idea that Class 8 over-the-road trucks travel more than 100,000 miles a year is being dispelled a bit, Vieth said, noting that 45% of the sleepers in ACT’s database had less than 80,000 miles per year on them, and only 20% averaged more than 100,000 per year.
In terms of transmissions, the influx of automated and automatic transmissions on new truck specifications is beginning to infiltrate the used market, with 40% of sleepers sold on the used market in 2019 having such transmissions. That is up from 31% in 2017.
Vieth said inventory growth is expected to continue through the first half of 2020, with prices falling between 5% and 10% full year. As supply decreases, prices will remain flat into 2021, with the potential to rise up to 5%.