The Industry Report: 3rd QTR 2018 Vol. 001

US Shippers have seen trucking rates ascend to new record-highs in 2018 as dry van, reefer, flatbed and intermodal rates across the country continued to climb in the first half of the year. Shippers holding their breath in wait of rate relief may be blue in the face with little opportunity to exhale.

Our podcast, Consulting Logistics presented by Aborn & Co. , recently had the honor of sitting down with Donald Broughton, managing partner and principal of Broughton Capital, LLC. , to discuss the state of the industry. Read on as we cover the current issues that the US inland and intermodal markets are facing, the rising costs along each mode, the trade war, and solutions.

The Issues

Economy

Truck pricing rate escalation can be attributed to a 15-month recovery in both the industrial and consumer economies. As crude oil prices continue to rise, the United States has resumed fracking activities driving growth of the industrial economy and stimulating job growth. With the growth of the economy, truck drivers have more opportunities to work for competitive wages in other industries and the pool of available truckers continues to shrink. Further, we are in the midst of a strong consumer economy nourished by investment performance, millennial buying trends, and e-commerce. High rates of consumption by households put increased stress on the transportation market as manufacturers, distributors, and retailers try to find avalaible capacity to get their goods into markets. Historically low bankruptcy rates mean that more companies are being added than subtracted from the pool of available capacity.

According to the May Cass TL Linehaul Index, this is the strongest normalized percentage level of TL pricing achieved since deregulation (normalized meaning except for extreme periods of recovery from recession).

Capacity

"September, October, and June are the three strongest trucking months of the year. This June has proved no exception to that." said Broughton.

Capacity is key, and the fact is that there are still more loads than there are available trucks. This lack of capacity during a high demand month saw rates soar near or past previous peaks set in January. According to May's Cass Truckload Linehaul Index, the increasing rate of acceleration that began in November (November, December, January, February, March, April, and May were up 6.3%, 6.2%, 6.3%, 6.5%, 7.2%, 8.2%, and 9.0% respectively) is headed towards an 11% YoY increase.

ELD

"What we lost in capacity, in a short period of time, will be more than made up for in visibility"

While some thought ELDs would be our greatest cause for concern at the beginning of the implementation process, that has proved to not be the case. Although January saw rates balloon to all-time highs, carriers have begun adapting to the devices and are now using the data to optimize capacity. ELDs and trackable hardware traveling on trucks are not the only way that carriers are beefing up their technology stack in 2018. LTL carriers are reportedly investing heavily in technology with the goal of doubling their digital freight tender acceptance rate.

"Those shippers and receivers who take too long to load and unload you, that data is being actively collected and they're being properly vilified for their poor performance"

Carriers are creating capacity and increasing turns by selecting freight loads that allow them to perform at optimum levels. As we covered in our Shipper of Choice article and podcast, time is money to carriers and it's a resource that they're no longer allowing shippers to waste.

Driver Shortage

Freight can't move without anyone to drive it. With a shortage of over 55,000 drivers and growing, capacity relief isn't found in the employment line. A strong job market has further depleted the number of candidates looking to get behind the wheel of a big rig. While autonomous vehicles may help correct this situation in the long term, widespread use of them won't be a reality until the 2020's. Autonomous vehicles are already playing a key role in this market in 2018 as younger drivers do not want to enter the trucking profession where they see looming automation.

Modes & Markets

Dry Van

"Spot market rates, both the magnitude and the duration, determine what is going to happen in the contract market."

While the dry van spot market price spent most of the 1st quarter of 2018 above the contract price, it is now below it. This has little to do with a decrease in spot market price, as contract rates are simply increasing at a faster rate.

Reefer

Reefer rates and pricing have moved at similar rates to those of dry vans. The challenges initially presented by ELDs were addressed at approximately the same pace for reefers as they were for dry vans. However, according to Broughton Capital LLC's data, the DAT Reefer Weekly Barometer is predicting stronger contract pricing in coming months.

Flatbed

"Rates are higher in June and that's true across the board, and it's especially true in flatbed, who is struggling mightily to adapt to ELDs."

While dry van and reefer carriers have been able to effectively navigate the transition to ELD requirements, flatbed carriers continue to struggle. As flatbed trucks require more driver support, especially in securing loads, hours of service regulations have been a tremendous challenge for this mode. In addition, high crude oil prices have caused an uptick in fracking activity which has been tying up flatbed capacity.

Intermodal

"This is the first time that we're seeing large amounts of incremental demand in domestic intermodal that are not based upon the higher price of fuel, but that are based upon just finding capacity."

Shippers seeking incremental capacity by moving their goods via rail are not finding relief. Trucking capacity constraints and increased diesel prices are fueling a resurgent intermodal market. Rates have risen for 13 consecutive months and look to continue climbing as long as the trucking market remains strained.

According to Mr. Broughton, "The demand side of the equation, sans the threat of a trade war, appears poised to continue to grow."

Moving Forward

Trade War

Calamities seen can be prepared for but what about calamities unseen? The greatest threat to slowing down the US economy may be ourselves. With billions of dollars in new tariffs issued by and against the US, an economic downturn would increase capacity by proxy.

"We're not seeing the down pressure yet. The long term historical pattern is that we see the change in the goods flow before we see the economic headline. We haven't seen it in the goods flow yet."

Donald Broughton sees the greatest threat to commerce coming not from overseas, but from our neighbors to the North and South.

"It's important to understand the magnitude of NAFTA as a proxy. Eighty percent of the exports that come out of Mexico come to the United States. Seventy-five to Seventy-six percent of the exports that leave the country of Canada come to the United States. So, if we were to take the draconian step of not having trade with one or both of those countries, not only could you set off a recession in the United States but arguably you'd set off a severe depression with first Mexico and then Canada"

Ultimately, Mr. Broughton, doesn't believe things will get that dire.

"I don't foresee that happening. I don't necessarily agree with the wisdom of everything that the current administration is doing, but I don't think they're that stupid that they would allow that to happen."

Relationships

"The transportation market is one that, unlike the rest of the world - every other manufacturing market, every other commodity market, every other financial market out there - if you want a guaranteed price, or a guaranteed volume in the future, you pay for that. In transportation you're often guaranteed a price or some promise of volume and no one is compensated for that."

Being a shipper of choice and forging strong contractual relationships is what will divide the winners from the losers during these tough times in the transportation market. Traditionally, shippers and carriers haven't always done this.

"If rates move markedly above (contract rates) then a trucking company may magically say, Gee, we just don't have any trucks in St. Louis today.' If the rate falls dramatically below that, the shipper will go out into the spot market…and not keep its commitment to that trucking company. This is one of those points in the economic cycle where there needs to be relationships solidified."

During a capacity crisis, dollars and cents aren't as important as time and space. Shippers who are proven to keep freight flowing during the receiving process, and who abide by their volumetric commitments are finding the capacity that they need.

"Building relationships is important for both sides. It has never been more important to be willing to make small sacrifices in margin, if you're the asset provider, in exchange for real commitments."

Are you feeling the capacity crunch in 2018? Contact a trusted adviser at Aborn & Co. today for a complimentary consultation.
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To learn more about Broughton Capital please visit them at broughtoncapital.com

Listen to this episode below.