Capacity ‘overshoot’ pulls down truckload contract rates

Capacity ‘overshoot’ pulls down truckload contract rates

IHS Markit data show US truck registrations increased 40 percent in the second half of 2018, one factor expanding truck capacity in 2019. Photo credit: Shutterstock.com.

Truckload pricing power has swung back to US shippers, and it’s difficult to see when that might change as the US economy expands more modestly in 2019 than last year, Kevin M. Zweier, vice president of transportation practice at Chainalytics, said during a JOC.com webcast Thursday. The addition of fresh truck capacity is pulling spot and contract rates lower.

“What we predict in 2019 is that [truckload contract] rates are likely to be flat or a couple of percentage points down off a 2018 base,” Zweier said. “We saw equipment and [truck] driver capacity added during 2018. That overshot the market.” When it comes to pricing, “achieving a gradual equilibrium across such a fractured supply base is impossible, and the cycle repeats.”

Last year’s spot rate premiums over contract rates are now discounts, as spot rates fall below contract rates, Zweier said. “Year over year, we’re seeing contract rate differences in the low single-digit percentages and we’re starting to see some of them even go negative. That’s not a huge surprise after having two back-to-back years of sizeable rate increases,” he said.

At the same time, freight demand “hasn’t fallen off a cliff,” Zweier said. “We don’t hear people using the ‘R’ word when they’re talking about 2019.” Instead, he sees a return to more traditional seasonality after an exceptionally strong 2018. “Certainly we saw that seasonal slowness in the first quarter, although pricing was still elevated compared to 2017.”

Questions asked during the webcast on the 2019 trucking outlook showed that shippers are still trying to pick routes through uncertainty. Truck capacity is readily available at this point, but it’s unclear whether a seasonal surge in freight demand or supply chain disruption like that seen at the US-Mexico border this month would tighten the market enough to affect pricing trends.

IHS Markit data show US truck registrations increased 40 percent in the second half of 2018, one factor expanding truck capacity in 2019. As the freight economy slows, Class 8 truck orders have dropped, falling below 20,000 units for four consecutive months, according to FTR Transportation Intelligence. “Not every order translates to a true physical truck,” Zweier said.

Spot dry-van load counts rose in core markets last week, climbing nearly 5 percent in Chicago and Houston and more than 3 percent in Los Angeles, but US truckload spot market volume was down 40 percent year over year in the week ending April 13, load-board operator DAT Solutions said. Dry-van spot rates on average were down 19 percent from a year ago.

Shippers and truckers seem headed toward the type of “rough equilibrium” in capacity and demand they enjoyed earlier in the economic recovery, before more volatile demand swings in 2014, 2016, and 2018. But that imperfect equilibrium can be shattered by exterior events, such as Hurricane Harvey, or the imposition of tariffs and threats to close borders.

Imports that were “pulled forward” from January and February into the fourth quarter last year to avoid higher US tariffs on more than $200 million in Chinese goods affected first-quarter truck freight shipment volume, Zweier said. “As demand had been pulled forward due to the tariffs, that exacerbated what we see as the typical slow seasonal period of the first quarter.”

J.B. Hunt Transport Services confirmed the impact of pre-tariff “front-loading” in its earnings conference call, transcribed by Seeking Alpha, Monday. “The restocking of spring merchandise did not show up in March as it has in past years,” said executive vice president and president of intermodal Terrence Matthews. Goods shipped to the US in late 2018 largely remain in warehouses, he said.

“I think the volume growth will show up sometime in the third and fourth quarter,” David Mee, executive vice president and chief financial officer at the intermodal and trucking company, said.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.