Surging commodity prices played havoc with the U.S. trucking industry’s bottom line for much of the year, but they are now starting to ease in the face of rising concerns about weakening global economic growth and the “Eurozone” debt crisis. According to Credit Suisse Asset Management, 16 out of 19 index constituents decreased in value this past May, with precious metals such as gold and silver serving as the weakest sector.
And energy saw large price swings as Mississippi flooding posed a threat in the U.S. to refined product distribution channels. However, energy recovered some of its initial losses, ending the month down 7.26%.
Industrial metals were also lower, losing 2.74% in May, mostly due to concerns over potentially weaker demand from China, while agriculture turned in the “best performance,” noted Credit Suisse in its report, dropping just 1.76% for the month of May.
“The loss of economic momentum probably reflects the cumulative impact of surging commodity costs, which have squeezed consumer spending power and raised business costs,” said Nigel Gault, analyst with consulting firm IHS Global Insight in a recent report. “We expect U.S. GDP [gross domestic product] growth of just 2.0% in the second quarter, little different from 1.8% in the first [quarter].”
But the recent dip in diesel fuel prices – the result of declining oil prices – is an exceedingly welcome development in trucking. “Fuel has moderated some since mid-April with a large step-down in price occurring mid-May,” noted Benjamin Hartford, an analyst with Wall Street investment firm R.W. Baird & Co. in its most recent “Freight Flows” brief.
According to the most recent figures from the Energy Information Administration (EIA), the average price for diesel in the U.S. as of this week is just above $3.95 per gallon, down from an average of $4.10 per gallon at the start of May.
Since early May, crude oil has declined from the $110-15/barrel level to the high$90s/low $100s price levels experienced in February,” Baird’s Hartford added. “Recent stability in crude oil at current levels likely suggests potential for further downward pressure on diesel prices to the $3.70-80/gallon range experienced in late-February/early-March when oil was near the high-$90s/low$100s. Were recent fuel declines to continue, fuel would begin to represent a cost tailwind for truckload [carriers].”
Lower commodity prices also might ease what Jim Hebe, Navistar’s senior vp for North American operations, dubbed a “a big gap between order intake and actual build” for medium- and heavy-duty trucks in 2011 at a press event last month.
Hebe had concerns that while truck makers would see an increase in new truck orders beyond already strong numbers, “they won’t get built because of [capacity problems with] the supply base. We can’t raise production much beyond where we are right now because of supply issues.”
He said the supply issue resides with the Tier 2 suppliers that build parts and components for the OEMs’ Tier 1 suppliers. “With Tier 2 suppliers struggling, the Tier 1s can’t deliver,” Hebe said.
Easing commodity prices, however, might help alleviate some of that crunch. Still, Nelson Louie, Credit Suisse’s global head of commodities cautions that while commodities markets experienced a pull-back during the month of May, the timing of this correction matches last year's decline, with the markets focusing on very similar issues – slowdowns in global economic growth and sovereign debt concerns in Europe.
“Tight supply conditions amid increasing global demand are likely to exacerbate price action for the time being,” he warned.
“The potential for weather-related disruptions could affect key agricultural commodities,” Louie added. “Meanwhile, potential geopolitical unrest will be a primary focus as we approach the summer season, as any further disruptions may affect OPEC's [ Organization of Petroleum Exporting Countries] ability to control oil price,” he stressed. “In addition, continued accommodative monetary policy in the U.S. increases the odds of inflation overshooting expectations.”