TEXT-S&P comments on outlook for global heavy truck market

Sept 18 - The outlook for global heavy truck markets looks increasingly hazy in the second half of 2012 and 2013, according to a report by Standard & Poor's Ratings Services titled "Can Global Heavy Truck Makers Downshift Fast Enough To Ride Out Wavering Demand?" In our view, it won't be until the new order intake in the fourth quarter of this year that we will get the first indication of what the market will look like in 2013.

Average industry profitability dropped by more than 100 basis points in the first half of 2012, compared with full-year 2011, when profit margins were close to their 2007-2008 peaks. Average profitability is now slightly less than 7%, compared with slightly more than 8% in 2011. Although the industry doesn't see this as an alarming decline, truck makers are concerned about the trend.

As long as the current slowdown remains moderate, we do not envisage any major rating changes for the remainder of 2012 thanks to truck makers' increased cost flexibility, ability to make rapid adjustments to production volumes, and solid finances.

However, the overall picture could worsen significantly if a more severe downturn materializes. The credit metrics of the investment-grade truck makers (those rated 'BBB-' or higher) have declined from strong levels in 2011, reflecting the turbulence in the global economy.

There are three factors that we believe could increase the severity of the slowdown in Europe this year: A potential lack of credit for truck purchases if bank lending become increasingly constrained; weakening in the Brazilian market, which is significant for Europe's truck makers; and a possible double-dip recession.

However, even if Europe were to suffer a double-dip recession this year, we wouldn't anticipate as severe a slump in the demand for trucks as during the global recession of 2008-2009, which decimated the market. Unlike then, the truck market is not currently overheated, order inventories are manageable, and truck makers have leaner cost structures and stronger balance sheets to withstand a moderate slide in demand.

Increased economic uncertainty has made the outlook for the North American truck market similarly hazy. There was a weak order intake in the U.S. in the second quarter of 2012. This was surprising because it followed strong performance in the previous 18 months reflecting high demand after a four-year downturn.

The sudden drop in orders could signal a degree of overproduction. Therefore potential inventory build-up in the coming 6-18 months could preclude a continued rebound in demand. Freight growth, trucking companies' profits, and used truck prices will in our view be crucial in determining future production volumes.