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Analyst: California freight recovery key to 2017 rate upswing

Shippers need to start planning for a "changed environment," says DAT's Montague

Load-to-truck ratios have begun to climb significantly, doubling from this time last year—an “early warning sign” that truckload rates should begin to improve after a dreary 2016. Indeed, shippers can expect “a changed environment” by the second half of the year, suggests Mark Montague, senior industry analyst with DAT Solutions. Montague presented the DAT analysis during a Stifel Capital Markets conference call Thursday on first quarter “winner and losers” in the truckload market.

“Something is changing. The freight markets are getting more robust,” Montague said.

But, he explained, each equipment type is tracking differently. His grades for the first quarter: Van, C+, based on year-over-year improvement; Flatbed: A-, because rates haven’t improved as much as they should have in a strong freight environment; and Refrigerated: D, because of an ongoing downward rate trend.

For truckload van, an intense concentration of activity from the Gulf northward along the Mississippi into Missouri is spurred by a rebound in the petrochemical industry. However, weakness in long-haul opportunities out of California has “artificially boosted,” or relocated much of that capacity eastward. So even with a rising number of loads, capacity supply has kept pace.

Indeed, the 15-month contract rate trend for the van segment has remained flat, even declining slightly over the past six months.

“We see confirmation of what we’re hearing from a lot of shippers,” Montague said. “They’ve been able to get good deals in 2016 and even into 2017.”

Spot rates, however, have begun to show a reversal from the January-February “off season,” and are beating their year-over-year average, he explained. Also of note, the spot market got a better-than-expected boost from e-commerce in the holiday run-up.

The spread between contract and spot rates continues to favor shippers and brokers, a trend that began in early 2015, according to DAT.

Despite widespread demand for trucks, flatbed contract rates have been in a gradual decline over the past 15 months. However, spot flatbed rates—a more substantial share of the market than in the other segments—have taken a sharp turn for the better since the beginning of the year and are “the star” of the first quarter.

“We see that uptrend as ongoing as we go deeper in the year,” Montague said. “The spot market is often three to six months ahead of contact rate changes. This was an early spring for flatbed, about a month ahead of schedule. The flatbed picture is strong, and if we get an infrastructure bill it will be exceptionally strong.”

As for reefer rates, Montague called the segment “the laggard,” and suggested the California drought (and this year’s recent flooding) has driven capacity from the state.

“When there’s a lack of California freight, that means refrigerated trucks don’t go to California as much—which means there more capacity,” he said. “With more trucks competing, that’s knocked refrigerated rates down, and that also had a spillover effect into van freight.”

But now that the drought is over and floods have receded, the produce market is picking up.

“Things are poised for a lot of recovery in June,” Montague said. “This gives us a reason for optimism about the freight market. With California produce back in the game, that means the reefers running around the East will back in long-haul, and the length-of-haul means there’s fewer trucks to compete for produce east of the Mississippi. That means vans won’t have reefers competing with them on long-haul freight out of California and will bring up van rates.”

Looking ahead, he suggested that the California recovery will continue to tighten capacity, but that ELDs, Federal policy, and infrastructure are “wild cards.”

“Lanes are shifting, perhaps looking more like 2015 than 2016—we’ll have to see if it ends up looking more like 2014,” Montague said. “Spot rates will be stronger despite what some people are calling loose capacity, but the load-to-truck ratios are saying that capacity is disappearing. And although contract rates are not catching up yet, we see enough moving on the spot market that I think the second half [of 2017] looks better. Shippers need to start planning for a changed environment.”

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