If residual value is not there, some fleets may alter purchasing plans going forward
Many fleets may be ignoring the used truck market, but that could be a mistake when it comes to the financial bottom line. The fact is pricing in the used market affects the value of the fleet equipment that will become tomorrow’s used trucks, and that could alter fleet purchasing plans for new vehicles.
In 2008 through 2010, an oversupply of equipment hit the market following several years of record production, including a high of 284,000 units built in 2006, and helped drive down prices significantly. The current slide in prices is not as severe – that previous downturn was also affected by the Great Recession – but it bears watching following strong production numbers of the past two years and another year where production is shaping up to be solid.
“A very large volume of used trucks sold in the business are 3, 4, 5 or 6 years old,” Steve Clough, president of Arrow Truck Sales, said on Tuesday on a conference call hosted by Stifel Financial Group. “What happened 3 years ago, 4 years ago, 5 years ago, drives the supply of [current used trucks].”
Prices of used trucks jumped in recent years, Clough said, because there was a low supply following years of low production rates of just 151,000 in 2007, followed by years of 133,000, 95,000 and 107,000 in 2010. Clough also said that Navistar’s issues with its MaxxForce engine, which has cost the company hundreds of millions of dollars in warranty claims and write-downs, also contributed to the price rise as customers shied away from those trucks, removing part of the inventory.
The MaxxForce issues should be clearing up, though, as Navistar offers new engine options that meet modern emissions requirements. The company also recently said it would export thousands of MaxxForce 13-liter-equipped trucks to foreign markets and took a $60-million charge on its second-quarter financials.
“When you have such extremely low supplies coming in and demand escalating, that really pushed up used truck values during that time frame,” Clough said.
Clough anticipates a used truck supply of 177,000 units this year, down from 2016’s 193,000. The recent high was in 2015 when there were 249,000 Class 8 trucks available.
Clough also noted that the number of trucks from the higher production years of 2012-2014 (600,000 units total) that are now on the used market is one of the reasons prices have dropped recently. That can have an impact on fleet decisions in terms of purchasing new trucks and trading in older ones.
“We believe that as used truck prices dropped from record highs in 2015 and 2016, we saw a direct impact on new truck demand in 2016 that has continued somewhat into 2017,” Steve Tam, vice president-commercial vehicle sector for ACT Research, told FreightWaves. “As truckers were upside down (owed more than their trucks were worth) or they were not worth as much as they had planned at trade, they extended their normal trade cycle in hopes of values coming back into alignment. It is one of our hypotheses that this ‘correction’ has contributed to the better-than-expected demand in 2017.”
A report on Trucks.com said that May’s used truck market dropped for the third straight month, according to Price Digests’ Price Stability Index. The Index was 96.40 in May, down from 97.54 in April. Trucks.com noted that a reading of 99 to 100 is considered a stable market.
The firm did note that prices were up slightly in May compared to April due to smaller inventories.
Trucks on the auction market also took a hit, due in part to a 75% increase in inventory. “Volume and pricing of our benchmark model decreased notably in May,” wrote Chris Vasser, a J.D. Power Valuation Service analyst in a recent blog posting. “Pricing of this model was 10.1% lower month-over-month on average, which is a major change from the flat pricing seen in the first quarter and April.
Model-year 2011 vehicles dropped 13.4% in value; 2012s were down 5.2% and 2013 models fell 11.6%.
“May’s disappointing results increased monthly depreciation averages,” Vasser wrote. “In the first five months of the year, trucks of model-year 2011 averaged 3.1% depreciation per month, trucks of model-year 2012 depreciated 1.1% per month, and trucks of model-year 2013 essentially lost no value in this period.”
Conversely, new truck sales have remained robust. Despite a 30% drop in May compared to April, Class 8 orders remain well above the year-ago average. ACT said that May’s orders were 16,800 units and many in the industry are still forecasting truck orders in the range of 200,000 to 228,000.
Clough sees production need to fulfill replacement volumes at 185,000 units per year. Actual production numbers have been above that number since 2012.
“The fact that new truck retail sales have been above that replacement demand for all these years … the tendency would be to have prices drop a little bit more over the coming years,” he says. “But it is possible the economy could grow enough that we could see volumes grow, tonnage grow, that you could see prices firm, but not likely next year.”