It’s getting ugly out there in the freight markets and unfortunately may get uglier still for trucking before better times return – perhaps an indication that the glass will be half empty for motor carriers at least in the near term.
John Larkin, managing director and head of transportation capital markets research at Stifel Financial Corp., recently attended the annual Eye for Transport conference in Chicago, meeting with a range of third party logistics (3PL) and trucking company executives and didn’t come away with a lot of good vibes.
First off, freight volumes remain in his words “rather soft” with little evidence of the normal seasonal uptick. “It appears that consumers will replace auto and white goods when they fail, but then will cut back on the purchase of other items,” Larkin noted. “With inventories showing only modest declines, freight volumes continue to suffer as there is a reduced need for frequent inventory replenishment.”
He stressed that these “challenging” freight market conditions are likely to continue “at least the end of 2016, if not beyond.”
Not exactly music to the ears of truckers, I would say.
Though not quite as gloomy, a similar thread emerged from the 27th annual State of Logistics report issued this week – a report authored by Sean Monahan, a logistics expert with consulting firm A.T Kearney, published by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics.
Monahan noted that “economic and carrier conditions are expected to continue favoring a ‘shipper’s market’ over the next six months,” though several “realignment” factors – including trucking capacity, inventories, interest rates, and economic growth – are projected to result in moderately higher transportation rates in 2017.
For now, though, excess trucking capacity – particularly in the full truckload sector – is helping to squeeze rates, as this story noted.
Stifel’s Larkin added that the pressure on trucking rates isn’t going to abate anytime soon.
“Some shippers continue to pound on rates and pricing, with one broker [at Eye for Transport] mentioning that many of his customers are coming
to market for the third time this year asking for ever lower rates,” he said, pointing out that these rate cuts are averaging in the low single digits in terms of year-over-year percentage declined.
“Medium-sized carriers as well as small carriers and brokers are cutting price for fear they will be left high and dry if they don’t,” Larkin emphasized. “The larger carriers can get away with negotiated decreases for the most part. But some fear that we may be approaching the limit on how far down prices can be pushed without harming the supply of capacity from the smaller carriers.”
That’s critical as a lot of freight supposedly hauled by larger carriers actually gets outsourced to smaller ones as this story explained (although Landstar has a VERY different take on how such “outsourcing” is characterized where its operation is concerned; you’ll read more about that in my next blog post.)
Yet that doesn’t make big carriers immune to the fallout from the ongoing push for lower rates. For example, Larkin pointed to Werner Enterprises, which is currently dealing with what it describes as “decelerating rate per total mile trends” from difficult 2016 customer rate negotiations and weak spot market rates.
“Werner’s management opted to dive more deeply into the poorly priced spot market [this year] effectively incurring short-term pain for long-term gain,” Larkin said. “They wanted to maintain the flexibility to re-enter the contract market when rates firm. The alternative would be to cut contract prices and to live with those depressed rates for a year or two. [Thus] no carrier will be totally insulated from the volume weakness and the rate carnage.”
He added that this “pressure on rates” continues to build through June, normally one of the year’s strongest months in terms of freight demand. “Normally, shippers will not exert rate pressure in the stronger demand months [but] that rule of thumb has not held up so far in 2016, unfortunately for carriers,” he explained. “So rates are likely to remain low for at least the rest of 2016, with the possible exception of the e-commerce surge in late November/early December.”
Yet longer-term, the cards definitely seem to favor trucking. Larkin believes ongoing capacity reductions initiated by carriers should begin to gain meaningful traction by late 2016 or early 2017, while early stage capacity reductions related to the implementation of the federal electronic logging device (ELD) mandate should begin to become more evident during that same time frame.
And that’s not all. Though many continue to pooh-pooh the idea, the need for more positive collaboration between shippers and motor carriers is only going to grow – and you can’t have such collaboration when shippers resort to “Neanderthal practices.”
A.T. Kearney’s Monahan addressed this point at length in the recent State of Logistics report, stressing that shippers themselves are making demands of their transportation providers that are at odds with a low-price mentality.
“The market has seen an increase in shipper demand for visibility and control into all transportation management activities and assets in order to enable their optimization,” he explained. “Transportation Management Systems (TMS) are the tools that enable this visibility and control by orchestrating the transport of goods between manufacturing locations, storage facilities, and customers.”
He added that there is also a growing need by businesses to develop “long-term relationships” to enable profitable and sustainable growth, and that in turn requires and “evolution” from transactional price reduction to total cost improvement and then to overall profit & loss impact.
“This means that a price-based RFP [request for proposal] approach is giving way to a collaborative, interactive, design-based approach that is generating higher margins for many 3PLs,” Monahan said.
That’s why he thinks the current rate “softness” in the motor carrier market is probably more a short-term phenomenon than a “new normal.”
“With the labor market improving and motor carriers cutting expansion plans, an acceleration in economic growth will likely lead to tighter capacity and increasing rates,” Monahan explained.
Let’s hope that scenario occurs sooner rather than later.