Remember those days of flat or falling prices, way back in late 2003? That memory is receding fast. By early March, both diesel and gasoline prices were closing in on the records they had set last year.
What made this run-up different is that it was accompanied by hefty increases in many other commodity prices. The Institute for Supply Management, which surveys purchasing managers, reported that its manufacturing members listed 35 items up in price in February, while those at non-manufacturing companies listed 43. Both groups reported shortages of steel.
Further evidence of widespread price increases came from the 12 regional Federal Reserve Banks, which survey their businesses eight times a year and publish the results in the “Beige Book.” For the first six weeks of 2004, they report accelerating price increases for some industrial commodities, including steel and natural gas.
There's a mix of reasons for the outbreak of price hikes. Demand has risen for many items worldwide, as China's economy is finally making the “great leap forward” that eluded it for so long, while the U.S. economy grew faster in the second half of 2003 than it had for any half-year since 1984. The fall in the dollar makes the U.S. a cheap place for other countries to shop, while making imports from them more expensive.
The long slide in manufacturing has reduced capacity, putting 40 North American steel producers out of business in recent years. And the tendency throughout the supply chain to rely on trucks to deliver goods “just in time” instead of hanging onto inventory “just in case” has made shortages more likely when demand surges.
Some specific factors also contributed to the current problems. A devastating fire at the leading coke-producing coal mine in West Virginia has left steelmakers scrambling for raw materials. The alternative source of new steel — scrap steel — is soaring in price because China is buying every pound it can find ships for.
What are the implications for trucking? Higher costs for fuel, as well as for trucks, tires, and lubricating oil.
Increased prices for steel, aluminum, copper wiring, and plastic will also work their way into the cost of rolling stock since truck sales and activity have picked up enough that dealers won't be afraid to pass on cost increases.
A tax break for buying new equipment, known as 50% bonus depreciation, is due to expire at year-end. That may stoke demand even more and make buyers less resistant to price increases. Should shortages become rampant, some vehicles won't be delivered when promised if the manufacturers can't get the steel or components on time. That will be very costly for buyers that fail to put new equipment into service by December 31.
Even carriers that aren't buying new equipment may feel the effects of steel and oil price hikes in the cost of steel-belted, synthetic-rubber tires. The oil prices may also show up in costlier motor oil.
The bottom line: After years of flat or falling equipment prices and several months of stable diesel prices, fleet executives need to brace themselves for a prolonged period of price escalation. Even worse, shortages may crop up in a variety of commodities. That could leave some trucks with nothing to haul, and trucks on order unable to be completed.
This is not the time for hoarding or panic buying, which can make the price spiral worse and leave some buyers with plenty of remorse if they buy just before prices turn back down. On the other hand, it's better to keep your tanks a little fuller and to accelerate your buying plans for new equipment now just in case you don't get everything you are counting on just in time.