US Shippers Curb Their Expectations

US Shippers Curb Their Expectations

Shippers aren’t only scaling back how much freight they plan to move this year and in early 2014, but also how much they plan to pay to transport their goods by rail, truck, air and sea.

In a survey conducted by Wolfe Research this spring, shippers said they plan to move on average 2.8 percent more freight in 2013 and the first quarter of 2014, a 0.5 percentage point deceleration from what they expected in the first quarter. The anticipated shipment volumes for this year, however, are still 0.6 percentage points higher than shipper forecasts from the first quarter of 2012.

“Shipper budget expectations also decelerated excluding the impact of fuel, and we believe this primarily reflects more modest rate increases compared with a year ago,” according to a report based on the survey of approximately 100 shippers whose transportation budgets total nearly $20 billion.

Shippers expect their transportation spending to rise 3.5 percent, down from their projections of a 3.7 percent increase in the first quarter and their forecast of a 5.6 percent rise made a year ago. The majority of surveyed shippers expect freight volume to outperform the general economy in 2013.

Although inventory levels are higher than in late 2009 and early 2010, they lag the historical peaks seen several years ago, reflecting shippers’ efforts to keep their supply chains leaner. Current levels suggest “that inventory destocking has ceased and restocking has started, with materially more shippers seeing higher levels of inventory than the past couple of quarters,” Wolfe Research said in the report entitled “The State of the Freight.”

Shippers on average expect to see truckload pricing, excluding fuel, to rise 1.6 percent this year, a slightly higher forecast than in the first quarter, but still far below the 2.5 percent hike expected a year earlier. Similarly, less-than-truckload rates are expected to rise just 1.6 percent this year, a 0.2 percentage point decrease from shippers’ estimates in the first quarter and far below the 2.5 percent increase anticipated a year ago. Shippers’ expectations on LTL pricing appears to fly in the face of the mid-single-digit general rate increases recently announced by ABF Freight System, UPS Freight and FedEx Freight.

“While most carriers seem focused on improved pricing, we believe strong LTL pricing gains are tougher to sustain after the past couple of years (of) strong yield growth and given relatively muted tonnage levels for the group for the past few quarters,” the report stated.

When it comes to LTL and truckload pricing growth, shippers saw more of the same. Truckload pricing rose 2.2 percent year-over-year in the first quarter, compared with a 3.2 percent rise in the fourth quarter of 2012, according to the survey. Wolfe Research says that’s because “balanced capacity relieved some of the rate pressure for shippers after Hurricane Sandy, and the busy holiday shopping season had seemingly pushed up freight rates in fourth quarter 2012.”

LTL pricing also appears to have decelerated, with shippers reporting they paid 1.9 percent more in the first quarter, compared with 2.5 percent in the fourth quarter.

The two types of trucking diverge when it comes to shippers’ capacity projections. Fifty-nine percent of shippers expect truckload capacity to tighten, a 12 percentage-point increase from their expectations in the first quarter. Only 16 percent of surveyed shippers forecast the same happening in the LTL market. Sixty percent of truckload shippers said capacity was tight in the first quarter, a 5 percentage point increase from the fourth quarter. Conversely, shippers saw more level capacity in the first quarter than in the last three months of 2012.

The “sense is that demand levels have accelerated somewhat (in May) after softening in March and April, so we suspect (truckload) capacity could tighten in the next few months and more materially by summer if changes in the hours of service rules take effect as expected in July,” Wolfe Research said.

The new rules, set to take effect on July 1, will require drivers to take a 30-minute break after driving seven consecutive hours. Nearly 90 percent of shippers expect the new regulations to decrease capacity, with an average of 2.8 percent of space being taken out of the market.  

As on the truck side, shippers expect to see the pace of rail hikes, excluding fuel, to slow. Shippers anticipate rail rates will rise about 2.6 percent, a 0.5 percentage decrease from their first quarter forecasts and down 0.4 percent from last year’s estimates. The expected slowdown in pricing gains “reflects fewer legacy contract re-pricing opportunities and slower rail inflation, which some rails use for rate increases in multiyear contacts,” Wolfe Research said.

A negative mix — seen in weak coal volume and healthy intermodal volume — also is contributing to the deceleration.

Union Pacific Railway, which is the exception when it comes to the industry’s lack of legacy contract re-pricing, has been the most aggressive in rate increases, shippers said. Norfolk Southern Railway, CSX Transportation, BNSF Railway, Canadian National Railway, Canadian Pacific Railway and Kansas City Southern Railway follow UP in the intensity of its pricing aggressiveness, the survey found.

A similar pricing slowdown can be seen on the intermodal side. Shippers expect intermodal rates to expand 1.8 percent, compared with their averaged forecast of 2 percent in the first quarter and a 2.2 percent hike a year ago. “We believe intermodal rates ultimately remain driven by the direction of truckload pricing, as the floor for (truckload) rates is typically the ceiling for intermodal pricing,” Wolfe Research said.

Shippers’ shift of freight from the roads to the rails appears to be gaining steam, as net freight modal shift hit 2.7 percentage points in the first quarter, compared with a 2 percentage point increase in the last three months of 2012. For the third consecutive quarter, shippers cited the lower cost of rail or rising truckload rates as the major reason for the modal shift, while disillusioned intermodal shippers said poor rail service or coverage was the reason they put loads back on the road. Rail capacity didn’t appear to be an issue for shippers, nor is it expected to be in the year ahead.

“Despite muted TL rates and flattish fuel costs, we believe shippers will move more freight from the highways to the rails because of new intermodal lanes and terminals opening up and because of concerns around truckload capacity later this year if changes in trucker hours of service rules take effect,” Wolfe Research said.

Parcel shippers expect FedEx and UPS pricing to slow, with the former raising rates 2.2 percent and the latter hiking prices 2.1 percent. Survey findings suggest shippers will increasingly shift more domestic freight from air to slower-but-cheaper ground transport. A similar trade-down in priority to deferred air freight also is expected, with 34 percent of shippers saying they expect to shift some volumes, compared with 25 percent in the first quarter and 31 percent a year ago.

Shippers expect rates for heavy air freight to dip slightly, as carriers grapple with weak volume and overcapacity.

Container shipping lines face similar challenges, resulting in shipper expectations for a mere 0.4 percent rate increase in global trades through this year and early 2014.

About 2 percent of shippers plan to shift ocean freight to air services, a 2 percent deceleration from first quarter estimates. About 19 percent of shippers plan to shift freight in the opposing direction, a slight uptick from the first three months of this year.

“This is consistent with what we’ve heard from both integrators and freight forwarders that air freight volumes have been negatively impacted by customers continuing to shift volumes to ocean from air, although there are signs this negative shift away from air freight may have peaked,” Wolfe Research said. 

Contact Mark Szakonyi at mszakonyi@joc.com and follow him at twitter.com/szakonyi_joc.