Truckload carriers, seeking to boost profitability in an uncertain economy, will be tightening up on capacity in 2017, predicts Matt Harding, vice president of the Freight Market Intelligence Consortium at Chainalytics.
Exactly how individual shippers are affected by the consequent rate increases will depend on what they're paying now, and whether they've been relying more on contract or spot rates, Harding says.
It doesn’t take much of a memory to recall the last big capacity crisis of 2014. Since then, spot rates have trended steadily downward, at a combined rate of close to 20 percent. “It’s a complete reversal of the market versus two short years ago,” notes Harding.
But, like every other aspect of the economy, freight rates and capacity run in cycles, and this one is about to turn in favor of truckload carriers.
Precisely when that will happen is uncertain, says Harding. There’s a lag between economic conditions and carriers’ response in the form of adjusting capacity. Ramping up, they need to order power units and train drivers, an exercise that can take up to six months to complete. The same goes for the removal of capacity when demand plummets. (The Great Recession of 2007 led to the selling off of huge numbers of power units from the North American market, a state of affairs that took years to correct.)
As recently as late summer of this year, spot rates were still on the decline. According to the DAT North American Freight Index, the average line haul rate for vans fell 6.6 percent in August, compared with the same month of 2015, while reefer rates dropped 5.1 percent and flatbed rates 7.2 percent. At least part of the decline was due to a drop in the average fuel surcharge, caused by cheap diesel. That factor alone accounted for a fall in total revenue per mile by 8 percent for vans, 6.9 percent for reefers and 8.2 percent for flatbeds, DAT said.
Chainalytics draws on data from approximately 170 customers, furnishing some $35bn in annual transportation transactions for measurement and analysis. What the firm sees now is a “hesitation” among companies in response to sluggish economic activity, Harding says. That sentiment is likely to lead to a downsizing of truckload capacity in the coming year.
The first place carriers go to shore up profits are their biggest accounts, says Harding. They are the shippers who tend to get the best deals when markets are soft. The opposite can occur when demand begins to exceed capacity.
Conventional wisdom dictates that bigger shippers get better rates, but that’s true only part of the time. “It’s a myth that if you leverage your spend in the market, you get a better rate,” says Harding. “Generally speaking, economies of scope are more important to carriers than economies of scale.” Truckers’ focus is on crafting balanced networks that minimize empty miles.
For their part, shippers ought to be concerned with more than just price. Their priority is, or should be, reliable capacity – “having a carrier that’s very efficient, on time and with a high level of service and flexibility,” Harding says. Shippers want the lowest possible rate, but not if it interferes with their ability to respond to production changes, marketing promotions and sudden shifts in buyer behavior.
Harding says shippers should manage their transportation similar to the way in which a financial manager oversees a retirement portfolio. They might call on a mix of spot and contract rates, dedicated and common carriage, and be willing to pay more for capacity in select lanes where service and scale are paramount. So a rate rise next year isn’t necessarily the end of the world for big shippers, especially if they can maintain reliable connections to their customers.
On the ocean side, the picture for 2017 is starkly different. It’s true that ocean container rates have begun to rise since announcement of the Hanjin Shipping Co., Ltd. bankruptcy. The removal of Hanjin’s ships from the trade is chipping away at the chronic overcapacity that dominates major routes. Between March and September of this year, average short-term rates in the trade between East Asia and Northern Europe rose from $552 to $1,172 per 40-foot container, according to the freight-market index of Xeneta.
That doesn’t necessarily signal a return to health among struggling ocean carriers, though. “On the face of it, this is a strong development for container ship companies, but the industry has been undermined by weak fundamentals for so long that it’s not quite that simple,” Xeneta chief executive officer Patrik Berglund said in a company report.
The problem is deeper and more structural, the product of years of overbuilding by container lines obsessed with introducing ever-larger vessels into the trades. In 2016 alone, approximately 208 new ships entered the market, many of them mega-vessels with capacity of 9,000 forty-foot containers or more. The result has been an 8.1-percent oversupply of slots, a state of affairs that has “effectively hamstrung [carrier] businesses,” Xeneta says.
As with trucking, the ocean freight market will eventually adjust, albeit slowly. “Our feedback from shippers shows that they’re now struggling to negotiate market average prices from suppliers,” said Berglund. “This provides a strong indication that the upwards rate trend will continue and the container ship operators don’t want to get locked into long-term contracts at the same low levels they’ve previously offered.”
Shippers should expect to pay more for freight on land and sea in the coming year. But they’ll need to take an intelligent approach to dealing with carriers, balancing the need for contracts with the allure of the spot market. “Be really fair with partners,” advises Harding. “Don’t over-allocate your capacity. Have brokers in your network. But if you reach too far off the brass ring, and try to get too much of a spot-market benefit in your network, when it corrects it can be very painful.”