Tumbling Prices for Commodities Fail to Bring Relief to Truck Buyers

This story appears in the May 11 print edition of Transport Topics.

Prices of most key commodities used in making heavy trucks have dropped 50% or more since last year, but price reductions for tires, components and trucks have been difficult to find.

Although manufacturers raised their prices several times when prices of raw materials for trucks and tires soared in 2007 through mid-2008, they said recently they were still trying to recover those higher costs.

“When you look at our raw materials, we are using for a cost basis what we bought last summer, [at] the height of their prices, when petroleum was over $140 a barrel and rubber [was] at its peak,” Keith Price, spokesman for Goodyear Tire and Rubber Co., told Transport Topics.

The spot price of rubber on the Tokyo Commodity Exchange illustrates the dramatic plunge: rubber fell to $1.495 a kilogram on April 28, from $3.801 in September 2008. Crude oil on the New York Mercantile Ex-change dropped to $49.25 a barrel from its July peak of $145.29.

Similarly, on the London Metal Exchange, a metric ton of primary aluminum fell to $1,389 on April 28 from $3,200 in June 2008; nickel fell to $10,800 from $33,000, and copper fell to $4,000 from $9,000.

As an example of dozens of types of steel trading at various prices, Mediterranean steel ingot dropped to $310 a ton on April 28 from $1,100 in June 2008.

But in the Producer Price Index for finished goods, the Labor Department reported in March that the price of heavy trucks has increased 4.4% since March 2008. In July, the chairman of American Truck Dealers told TT that he had seen price increases “clear across the industry” directly related to commodity cost increases (7-14, p. 3).

Roy Wiley, spokesman for Navistar Inc., which placed commodity surcharges on its International vehicles twice last year for a total of $1,800 to $2,800 per truck, said a combination of factors has kept prices steady this year.

“No one anticipated that commodity prices would spiral out of control last year,” Wiley told TT. “We were concerned that those prices would continue to rise, so we hedged, and then we were locked into those hedged prices even though the prices of commodities have dropped sharply.”

Wiley said two other factors have held prices stable.

“Obviously, our suppliers also utilize hedging, and this has impacted their pricing to us,” Wiley said. “In addition, as the result of our extremely low order board, we have not benefited from any volume discounts as we have in past years.”

Mark Pigott, chairman and chief executive officer of Paccar Inc., which makes Kenworth and Peterbilt trucks, told investment analysts April 28 that his company was “having some benefit” from falling commodities, but he indicated they hadn’t dropped enough to cut truck prices.

“But, you know steel, aluminum, obviously oil products, are all coming down, but I think if you ask most people who are making something, they say they still have a ways to go,” Pigott said.

Components makers for heavy-duty trucks also said that lower commodity prices have not translated into lower costs.

Pedro Ferro, president of CV Undercarriage — part of Marmon Highway Technologies, a subsidiary of Berkshire Hathaway Inc.  that produces brakes, axles and suspensions for commercial vehicles — said his company has cut prices but for competitive reasons, not because of the drop in commodities prices.

“Almost the entire ‘pricing surplus’ accumulated when commodities were on the way down is gone by now,” Ferro said. “The ‘real’ cost reductions came from downsizing and restructuring to compensate for the reduced volumes.”

Some truck dealers said they never expected the drop in commodity prices to cut the prices they pay for trucks.

“Peterbilt hasn’t lowered the price of its trucks this year, and no customer has asked whether the price should be lower because of the fall of commodities,” said Jim Hartman, president of Truck Enterprises Inc., an eight-location Peterbilt dealership based in Harrisonburg, Va.

Hartman told TT that “a lot of our customers assume they should get a much lower price because of the slow truck market,” but they don’t realize that manufacturers’ per-unit costs rise when they’re making fewer trucks. “That all has a lot more effect than commodities costing a little less.”

Representatives of Daimler Trucks North America, Paccar Inc.’s Peterbilt and Kenworth brands, and Volvo AB’s Mack and Volvo brands did not respond to requests for comment.

DTNA spokeswoman Maria McCullough did say that the company’s aftermarket products have not dropped in price.

“The aftermarket suppliers have not passed on the commodity cost reductions in their pricing at the same level as the production suppliers,” McCullough told TT.

Kyle Treadway, president of Kenworth Sales Co., Salt Lake City, said the manufacturer has not cut list prices and “no customer has asked about any link to commodity prices.”

“Most of us have inventory sitting here so long that commodity cuts haven’t trickled down to us,” Treadway told TT. “Instead of cutting list prices, manufacturers are offering incentives or discounts on older vehicles in our inventories or offering extended warranties and aftermarket discounts to make them more attractive, but none of it is related to commodities.”

At least one general sales manager offered a different viewpoint.

“Customers have asked us whether Freightliner has lowered the price of its trucks because of the drop in commodity prices, and in fact, we dealers have asked them as well, but they haven’t,” Robert Mulholland, general sales manager of McCoy Freightliner, Portland, Ore., told TT.

Mulholland said that automobile prices have been flat or fallen, “but the average price of every brand of tractor has been going up, whether the market was up or down. Five years ago, you could get a sleeper for under $100,000 and today, no matter what the brand, it’s $120,000 to $130,000.”