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Downgrade for Class 8 production and sales

April 20, 2012

A serious and growing disconnect between Class 8 production levels and retail sales has convinced some analysts to downgrade their outlook for the year – although others are characterizing this current “softening” in Class 8 demand as more of a short-term event.

Eric Starks, president of FTR Associates, told Fleet Owner his firm is lowering its Class 8 product/shipments forecast for North America – the U.S., Canada, and Mexico – to 275,000 units for 2012 from its prediction of 286,000 units made just one month ago.

“Our biggest concern in the near-term is the disconnect between production and retail sales, as production levels are substantially higher than sales,” he explained. “Also, the weaker orders suggest that current production levels are unsustainable.”

Starks also characterized current Class 8 inventory as “bloated,” noting that it’s almost at 2.5 months, which is well above the nominal 1.5 month level.

Though this does not necessarily indicate a major downshift in the broader economy – FTR’s data indicates the U.S. economy is experiencing steady growth with real gross domestic product (GDP) expanding at a 2.5% rate – the firm expects a slower pace of economic growth in the second quarter, with stronger but still modest growth in 2013 and 2014.

“On the freight side, volumes have eased back, and though truck capacity is still tight, cost pressures have gone up – especially fuel prices,” Starks explained. “That’s creating some uncertainty and thus fleets are becoming more skittish about buying trucks.”

FTR’s data showed that net orders declined in March to 19,706 units, a decrease of 10.7% month-over-month and a decrease of 31.5% year-over-year. Thus the firm slashed its North American Class 8 forecast for the year by some 11,300 units from last month and its forecast for 2013 by 9,900 units.

ACT Research is also reducing its Class 8 forecast as well, noting that Class 8 new and net orders of 22,038 and 20,025 units, respectively, according to its data this March were the lowest order volume numbers since July 2011.

However, Kenny Vieth, ACT’s president and senior analyst, believes this pullback is more short-term in nature.

“Class 8 demand, as expressed by incoming orders in February and March, has hit a soft patch,” he said. “[But] there was a tax-driven pre-buy at the end of 2011, and dealers added larger than seasonal stocks in the first quarter ahead of rising model year 2013 new truck prices.”

Given all of the above, plus rising diesel prices, it is not too hard to see why the industry has softened, Vieth pointed out.

“However, we think a continuation of reasonable freight growth, strong trucker profits, and healthy used truck prices will push demand higher once the current period of uncertainty is worked through,” he stressed.

FTR’s Starks echoed that sentiment to a degree, noting that his firm’s revised Class 8 forecast means 2012 will be a “good” year for heavy-truck production volumes – just not a “great” one.

“It suggests that it’s still a market driven by the need to replace older equipment, not one that’s aiming to expand capacity,” he said. “Higher sticker prices [due to the addition of mandated emission-control systems] are playing into this a little bit, but not much, because if there’s freight, fleets would buy trucks regardless. It means freight is just not up to where they expect it to be right now.” 

About the Author

Sean Kilcarr

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