The decreased volume of new medium-duty trucks sold from 2008-2010 has created a tight inventory of used trucks in today's wholesale market. As a result, demand is exceeding supply, especially for lower-mileage medium-duties in good condition, which has exerted positive upward pressure on resale prices across the board.
In addition, increased economic activity around the country is bolstering demand for medium-duties in both the new- and used-truck markets. The increased demand for new medium-duty product has caused order-to-delivery (OTD) times to lengthen. Not only have build times increased, but so have upfit OTD times. However, we need to keep in perspective that the sales gains of the current market are in relation to one of the worst economic downturns in the nation's history, from which we are slowly emerging. Business activity may be improving, but it still remains sluggish and even lackluster in certain industry segments.
For instance, the three key business segments that drive medium-duty truck purchases are vocational applications, construction, and government. Today, all three segments are struggling in a lackluster economy. Among the 11 major truck OEMs manufacturing Class 4-7 trucks, total sales for FY2010 was 56,643 units. This compares to 154,690 units sold by the same 11 OEMs in FY2006. Sales for Class 4-7 trucks haven't been this low since the recession of 1991-1992.
Although resale values in 2011 are very strong, it wasn't that long ago that prices were, figuratively speaking, in the dumpster. The decline in medium-duty resale values, from which we are emerging today, first began in late 2007, when the residential construction slowdown started. In 2007, resale values declined 10 percent and remained that way through the first half of 2008. Then, mid-2008, a combination of market forces converged to create a "perfect storm" to further depress resale values by 15-25 percent. These convergent forces were higher fuel prices, tighter consumer credit, and the stagnant construction market. As a result, the pool of buyers (hence market demand) for used trucks contracted in the 2007-2010 time frame, putting downward pressure on resale prices.
One long-term consequence to the low volume of new medium-duties sold during this period has resulted in a very tight inventory in today's wholesale market. This, coupled with an improving economy, has created an increased demand for medium-duty products.
Another consequence to the lower number of new medium-duties sold in the 2008-2010 time frame is that fleets extended the service lives of units in operation. As a result, medium-duties currently entering the wholesale market have much higher mileages. This has created a shortage of lower-mileage medium-duty trucks. During the economic downturn, many fleets extended the months in service and mileage for medium-duty trucks.
According to remarketers, it is not uncommon to sell medium-duty trucks today with 300,000 to 400,000 miles on them. Also, many fleets deferred purchasing new medium-duties in 2010 to avoid the first year of the new diesel emissions standards. These fleets wanted to see how the new 2010-compliant diesels performed before acquiring them due to uncertainty of the reliability of the new emissions-control technology being employed.
To take advantage of the strong market for used trucks, some fleets are short-cycling their medium-duties. One such fleet is Joy Global. "We have chosen to short cycle our medium service truck fleet at three to four years in service versus our normal five- to seven-year cycle. As a result, our depreciation has dropped to approximately 1.5 percent per month," said Mike Butsch, director of global operations.
Forecast for Medium-Duty Resale Values
The anticipation is medium-duty resale values will continue to remain strong due to limited inventory for the balance of the 2011 calendar-year and well into calendar-year 2012. There will continue to be an extreme shortage of quality used equipment. Demand for good condition, lower mileage medium-duties will continue to outpace supply. There are plenty of older, higher-mileage medium-duties, but as any fleet manager will tell you, they are more difficult to sell.
The wildcard is the construction industry, which traditionally has been a major purchaser of medium-duties. Presently, the market is depressed, but ultimately pent-up demand will bring upward pressure for more new construction, which in turn will help stimulate medium-duty sales.
Everyone agrees that medium-duty truck resale values will strengthen when there is a rebound in the new-construction market. Many used-truck buyers in the construction market are deferring purchases until a turnaround occurs.
For the balance of this year and 2012, there will be a shortage of desirable medium truck inventory in the wholesale market, causing resale prices to remain strong. The question is whether prices will continue to remain at current levels once the volume of used inventory begins to increase in the wholesale market.
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