I readily admit that anecdotal stories aren't a substitute for credible statistics when it comes to meaningful analysis of broad trends like economic recovery. Yet I still find that the right story heard at the right time is a lot more convincing than all the well-grounded expert opinion. Take my brother Tom's phone call last week about freight rates.
Tom has an industrial recycling business that sells raw materials to manufacturers. Since he's dealing in commodities that go to the highest bidder, he has no established freight lanes and uses the spot market to move domestic loads. In one particular lane, he paid $1,000 a truckload just four week ago. Last week, he was quoted $1,800 for the same move.
Worse, his traffic manager was telling him that in a number of markets it was taking days instead of hours to find carriers even at higher rates. On one route where he'd been paying $1,500, it took three days to get any quotes, and they ranged from $2,195 to $2,750. One lane was holding steady where he'd negotiated a six-month pricing deal awhile ago, but the longest rate term being offered now was three months, and even that was only being offered by one carrier.
“What's going on?” he wanted to know.
Actually, he had a good idea of what was going on. His business is at the very beginning of the production chain, and activity for all sorts of raw materials has been heating up substantially in the last month. As Tom described it, “Buyers are crawling in my windows.” It's been a long time since he's seen such a hunger for metals, paper, plastic and the other things needed to feed production.
Truck capacity shrank considerably in the recession, some estimate 15% or more. So it hasn't taken much of an uptick in freight to eat up what excess was out there and that put some strength into spot freight rates.
As someone who lives in a world of quick moving commodities prices, Tom has been through this cycle before. In the past, such jumps in truck rates were temporary as capacity came back quickly to chase the better money, and that's what he's expecting this time as well.
He wasn't happy when I told him that this time may be different. Historically, trucking has been an easy business to enter, and small fleets or owner-operators would stream back into the market as conditions improved. To do that, though, they need credit, and banks aren't in a lending mood, especially for anything as speculative as a small trucking operation.
Large carriers, too, have always been ready to step into the breach by expanding when conditions allow, but probably not this time. Downsizing over the last two years was painful, and they're not eager to jump back into the capacity race while we're still just on the leading edge of recovery.
Tom's expectation is that eventually one carrier will blink and make a move to add trucks, kicking off a wholesale expansion and dropping rates. Unfortunately for him, that's probably not going to happen for two related reasons: There aren't enough experienced drivers available, and the new CSA 2010 rating system makes it very risky to push a lot of new, inexperienced people into those seats.
Although at times during the last two years it seemed it would never end, the era of excess truck capacity is about over. If you don't believe me, just ask my brother.
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