Attention, K-Whopper shoppers: the blue-light tax special in aisle 168 has ended. Premium prices are now in effect.” You may not hear exactly that announcement at your local truck dealer, but be prepared for that general message. To stimulate purchases of new equipment a year ago, Congress enacted a limited-time offer called “50% bonus depreciation” — a catchy but exaggerated description of the benefit added to tax code section 168. It applies only to new equipment placed in service by Dec. 31, 2004.
But sales of Class 8 vehicles have been so hot recently that some manufacturers may not be able to deliver any more orders before the cut-off date. As early as April, when orders more than doubled from the April 2003 level, some delivery dates were being pushed into 2005.
The base price of equipment seems sure to rise over the next few months, even apart from the loss of some upfront depreciation. Truck makers are being hit by a variety of materials price increases, which they now have the clout to pass along. Fortunately, the outlook for truck buyers is rosy enough that they should still be able to justify the higher after-tax cost.
The most noteworthy price increases have been for steel. China, growing at 10% per year, was buying every pound of scrap metal it could carry overseas. The price tripled for scrap used by U.S. “mini-mills” to make steel for trucks and other uses. At first, truck makers either resisted or found ways to absorb the “scrap surcharges” that mini-mills passed through to smaller customers. But as demand for vehicles increased, manufacturers became less resistant to steel price increases and more willing to pass them on to increasingly eager truck buyers.
The scrap shortage eased early in the spring, as owners of formerly worthless buildings and rusting machinery suddenly found buyers willing to dismantle and remove them. Rising ocean shipping rates and an attempt by China's leaders to slow its economy reduced the demand for scrap and brought prices down. By then, however, demand for steel for construction, consumer products and machinery enabled steel producers to raise their base prices nearly to the level of the earlier scrap surcharges.
Similar stories played out with aluminum, copper, oil, natural gas, and wood products — nearly everything that goes into making a truck.
Raw materials prices should retreat from their peaks as conservation, substitution, and new supplies enter the market. But finished parts — and vehicles — are likely to remain pricier as long as the economy is buoyant. Fortunately, the demand for carriers to haul all those goods is also likely to remain robust. Consider these signs from just one week, May 3-7:
The value of March construction jumped to a new record, 1.5% above February's level.
New orders and shipments for manufactured goods both rose by 4%.
Purchasing executives in 16 nonmanufacturing sectors told the Institute for Supply Management that business activity and orders in April were the strongest in the survey's eight-year history.
More than 70 retail chains reported that sales at stores open for at least 13 months climbed 4.4% between April 2003 and April 2004.
Among them, these sectors represent a broad spectrum of demand for trucking. To have all of them so positive at the same time represents an unusually vibrant vote of confidence in future economic growth.
The bottom line: Don't be blue if you don't make it to “Aisle 168” in time. Even if you say good-bye to bonus depreciation, there's time enough for a good buy.