Pricing power tilts toward carriers

Pricing power tilts toward carriers

It is refreshing to hear shippers and transportation providers increasingly shed the view that they are looking to the year ahead with cautious optimism, considering it has seemingly been an economic “Groundhog Day” since the 2008 to 2009 global recession. But instead of grumpy Bill Murray being forced to re-live the same day in Punxsutawney, Pennsylvania, the US and global economy would be chugging along until a major disaster or some other event would sap confidence. 

This is no longer. US GDP accelerated from 1.5 percent in 2016 to 2.1 percent in 2017, and growth — according to IHS Markit, parent company of JOC.com — will ramp up to 2.7 percent this year. A similar story has unfolded globally, with GDP building from 2.5 percent in 2016 to 3.1 percent in 2017. Global GDP is forecast to gain momentum this year, with a 3.2 percent expansion. 

That economic health is driving growth in cargo volumes. Global container volume rose an estimated 4.6 percent in 2017, the fastest pace in six years, and is forecast to accelerate 4.9 percent in 2018, according to IHS Markit. US imports jumped 3.7 percent through September, compared with 2.1 percent and 0.7 percent gains in the same periods in 2016 and 2015, respectively, according to PIERS, a sister product of JOC. 

Things are bustling on land as well. US truck tonnage was up 3.1 percent year over year in the first 10 months of 2017, according to the American Trucking Associations. US intermodal volume rose 3.7 percent in the first 11 months, according to the Association of American Railroads. In the air, cargo demand soared 9.2 percent year over year, compared with an average annual growth rate of 3.2 percent over the past decade, according to the International Air Transport Association.

The volume growth, however, is moving the needle of pricing power away from shippers and to carriers. Nowhere is this more dramatic than in the air. Growth in e-commerce and broader speed-to-market pressure, coupled with capacity restraints — namely through the grounding of freighters — has propelled prices and forced shippers to scramble for space. Drewry’s East-West Airfreight Price Index gained 20 cents in October to reach a year-high $2.89 per kilogram, and reports from forwarders suggest upward pricing pressure continued through the end of the year.

Similarly, shippers have had to scramble for truck space and pay more for it. The DAT Solutions load-per-truck ratio hit a record high of 9.3 during the last week of November, meaning there were 9.3 available loads per dry-van tractor trailer on DAT’s load boards. Third-party logistics providers say spot rates are now bleeding into long-term freight contracts.

The pricing power shift is not as dramatic or consistent on the ocean side, but it is still happening. In early December, spot rates from Shanghai to the US West Coast were down slightly from last year, at a little more than $1,000 per FEU, according to the Shanghai Containerized Freight Index. But half of US importers from Asia surveyed by The Journal of Commerce expect trans-Pacific service contracts for the May-to-May period to rise as much as 10 percent. Even if carriers’ capacity discipline falters in 2018, the number of major east-west carriers has halved from 20 to 10 within three years, putting the writing for the long-term trend on the wall: pricing power is shifting. 

Contact Mark Szakonyi at mark.szakonyi@ihsmarkit.com and follow him on Twitter: @szakonyi_joc.