With dry van spot rates more than 10 percent below year-ago prices and truckload contract rates going negative year over year, US truckload shippers might be excused for thinking a turn in the truck market is not coming soon. But that market could flip in 2020 just as quickly as it did in 2017 and 2019, warns Chris Pickett, chief strategy officer for UPS subsidiary Coyote Logistics.
Through its quarterly Coyote Curve report, which debuted last year, the third-party logistics provider (3PL) mines market data to provide insight and forecast pricing trends. Pickett says current market data should alert shippers enjoying leverage in transportation pricing that next year will be a “transition” year. He explains why in the following Q & A.
JOC: Do you still see 2020 as a “transition year” for the truckload market, similar to 2017?
Pickett: In our third-quarter recap, we projected that the second quarter (of 2019) would prove to be our deflationary spot market inflection point and that the market would likely flip inflationary as early as the first quarter 2020 on a year-over-year basis. Contract rates would likely go year-over-year deflationary by the third quarter and bottom out going into 2020 before flipping inflationary by the end of next year. With most of the third-quarter data now in the books, our outlook remains unchanged. So, from a historical standpoint, 2020 is still shaping up to look and feel a lot like 2017 — the biggest wild card being whether we get an economic recession next year or not. The stronger the economy, and therefore the demand for truckload transportation, the higher and longer we expect the next inflationary leg to run.
JOC: What should shippers be doing to prepare for 2020? How should they view contracting and contract terms?
Pickett: For most shippers, looking back to 2017 to gauge how well the transportation network performed in relation to budget variance, spot market exposure, primary tender acceptance, and service levels will be a good indicator for what to expect in 2020. Unless the procurement strategy or distribution network has fundamentally changed, it would be logical to expect similar performance in 2020. To position the organization more favorably this time around, there is still time to take action as budgets get dialed in and annual bids kick off in the coming weeks and months.
First and foremost, set expectations that you will likely face at least some level of unplanned exposure to the spot market as spot rate inflation overtakes contract. Or, in other words, your transportation budget is likely to be under more duress than it was this year, so be sure to plan for it. That said, there is plenty that shippers can do to mitigate that pressure. Award volume carefully and try to foresee how each of your carriers will behave in an inflationary spot market. Will they honor their primary commitments? Again, their behavior in past cycles is probably a good place to start.
Contract rates will very likely fade lower in the short term, so the question will be around how long those rates hold up before tender acceptance starts to erode. Also, if there is an opportunity to contract for longer than a year — given the confidence in the volume forecast, the carrier base, and past history — this would be an ideal time for shippers to do so. Finally, consider alternative modes such as intermodal and volume LTL [less-than-truckload] as complementary capacity options should the 2020 truckload market prove to indeed be just as challenging as 2017-18. Whether those alternatives ultimately become attractive or not, having a plan in place beforehand could make all the difference in outperforming your competition.
JOC: How much excess truckload capacity exists in the market today? Are we headed toward a “new equilibrium” between supply and demand?
Pickett: According to our Q3 Coyote Curve, carrier capacity is starting to tighten relative to demand — albeit slowly. Incremental capacity brought into the market during the 2017 and 2018 investment binge is going underutilized, especially across the secondary truck market. Cost pressures are forcing trucking companies, especially small carriers that tend to be more exposed to spot market pricing, to either exit the market altogether or merge with other firms.
So, all of the things that typically happen during a deflationary correction are happening. With the spot market inflection point now confirmed for the most recent second quarter, that signals that enough capacity flight is happening relative to demand to put a floor under year-over-year rate deflation and start to bring the market to equilibrium by as early as next quarter.
That said, we observe that the market never bounces along in an equilibrium state for very long. We are almost always in a state of either supply surplus or supply scarcity (again, relative to demand) — and we don’t see anything to signal that the next cycle will be any different. This year it was supply surplus and next year we’ll likely be back to supply scarcity.
JOC: In terms of excess capacity, can trucking “cut its way” out of the problem, or will it take stronger economic growth to absorb the excess?
Pickett: Of course, the best-case scenario for both sides of the market would be strong economic growth stimulating enough incremental truckload demand to resolve the current capacity surplus without any further pain on the supply side. And hopefully, recent progress on the US trade policy front will help. But unfortunately, much of that is out of our direct control. Whatever relative supply surplus remains after accounting for any help from the economy will have to be addressed directly by the supply side through cutting in some form or another. Some carriers will find themselves better positioned than others to manage through that environment in the quarters ahead.