According to new statistics, spot market prices look as though they have begun to coincide with Class 8 truck orders. The correlation is more than coincidental – they actually seem to be working almost in tandem with each other.
In general, it makes sense that a freight market that is heating up might give carriers the ability to leverage excess cash to buy new trucks. What is truly interesting is how quickly those truck orders ramped up when the spot market rates go up.
The spot market has always been the benchmark price that the freight market measures its general health against. It is one of the few pieces of information that is aggregated about the market in general. A rate increase causes demand to outpace supply and expands profit margins. When profit margins go up, carriers tend to have more cash on hand – certainly a rare occasion under normal circumstances. One might think of a carrier as a person in this case. When a person gets a huge and unexpected raise, you might expect him to splurge on a large ticket item. In the trucking industry, a large ticket item (or items) usually means more trucks.
Three to five years is the general time frame for a first owner to hold a truck. This range varies based on the condition of the market and of the truck. After five years, most truck owners will look to trade out a truck in order to minimize the ever growing expense of maintenance on the vehicle. After the first quarter million miles on a truck (usually about 3 years of use), the cost of repairs and maintenance grow significantly. This is true especially if the truck has “hard driving” miles (miles driven without proper preventive maintenance). Some estimates see the cost of maintenance rise from $0.03/mile at the start of operation to $0.11/mile in the fifth year.
This added cost can drop a profit margin from 7% all the way to 2%.
2018 saw the freight spot market in the best position it has been in since 2008. The year over year rate average was 17% higher in 2018, while orders of new trucks rose 76%, according to the index figures kept by DAT National.
The industry has seen this level of correlation before, but not this type of speed. Big orders began around a month after the surge in rates in 2018. The last time that happened was in 2014, when orders corresponded with the rise in spot rate in almost real time.
Carriers have more access to real time information about changes in the spot rate than ever before. They had to rely on internal revenue and income statements, reacting to them. Increasing availability to information makes the market much more transparent, allowing potential buyers to time the market a bit more. More information also keeps carriers from blaming themselves for success or failure in selling. When times were good, carriers may have told themselves that the success was attributed to some internal measure, and when they were bad, they may have pointed to an imaginary failure point.
