Shippers, truckers wringing out new US capacity

Shippers, truckers wringing out new US capacity

Shippers are looking for opportunities to profit from the loosening of truck capacity and decline in spot rates, while keeping an eye on the economic horizon. Photo credit: Shutterstock.com.

DALLAS — Truck registrations in the US are up by double digits, but there’s more to the surge in US truckload capacity and subsequent decline in pricing this year than new Class 8 trucks rolling onto highways. Both shippers and carriers have become more efficient since the capacity crunch of early 2018, speakers at the Transplace Shipper Symposium here said Tuesday.

The use of electronic logging devices (ELDs), better management of freight, and a drive for better operating ratios and profitability, “all those things ultimately lead to a more efficient fleet and that creates capacity,” Frank McGuigan, CEO of the third-party logistics provider (3PL), said in an interview. That comes on top of “a natural insertion of capacity” that occurs each year, he said.

“I think there’s normal capacity growth meeting an economy that’s a little bit slower, but I also think there are some efficiencies occurring,” McGuigan said in an interview. Shippers also are speeding truck drivers through their gates, reducing detention time, and taking other steps to make those parts of the supply chain they control more efficient and to create capacity.

The ELD mandate was supposed to tighten capacity, its critics argued. That was true last year, but not at all in today’s truckload marketplace. The market is rife with capacity, truckload spot rates are depressed, and contract rates are dropping, shippers at the 3PL’s symposium said. But shippers here are more cautious than exuberant after seeing the market flip twice in two years.

Capacity-rich environment

“Why are we in a capacity-rich environment right now? There are a lot of reasons probably,” Rob Haddock, group director of planning and logistics for Coca-Cola North America said. “The question is, when does the next downturn [for shippers] come? I want to be in a better position next time.” That means avoiding some low-hanging spot market pricing fruit, he said.

“In the first quarter, did we chase the dollar in the spot market? No, because in the next few months our busiest season is coming up, and we’re going to need that capacity,” Haddock said. Other shippers, including Del Monte Foods, had a similar view. Del Monte expects to expand its use of intermodal 20 percent this year, despite potential truckload spot cost savings.

“Our volumes really spike in September and October, and that’s when we need our carriers to come up with the capacity,” Chris Dombrowksi, senior manager of intermodal and rail for Del Monte, said during a panel discussion. “We don’t wait until then. We move consistent intermodal volumes throughout the year so we have capacity we can count on in our busy season.”

Still, plenty of shippers are trying to claw back some of the rate hikes they gave truckload carriers and intermodal marketing companies last year. They’re having more success in the truckload market. “In 2019, every week, truckload spot rates continue to go down 2 or 3 percent,” said Ben Cubitt, senior vice president of procurement and engineering at Transplace.

Growing freight disconnect

Cubitt and others here note a growing disconnect between the US economy and the freight economy. Most indicators, including a first estimate that put first-quarter GDP growth at 3.2 percent, show the US economy growing at a healthy clip. Shipment volumes, however, have dropped, according to the most recent Cass Freight Index reports.

“We were all waiting this year for the spring bump, and it never really came,” said Cubitt, referring to the spring retail sales surge that usually lifts truckload freight out of the first-quarter doldrums in April or March. However, high inventory-to-sales ratios provide evidence that much of that freight may still be sitting in warehouses, waiting to be loaded onto trucks.

Retail inventory-to-sales ratios are now near the post-recession high point of 1.51 they reached in March 2016.The retail-only inventory-to-sales ratio rose from 1.47 in January to 1.48 in February, according to the US Census Bureau. In November, the ratio was 1.43. High inventories boost GDP, and they were a factor in the unexpectedly strong first-quarter GDP estimate.

Containerized imports dropped year over year in February, with US-bound container volume from Asia falling 6.7 percent and total US containerized imports declining 4.7 percent. In March, The number of Asian containers arriving at US ports rose 0.3 percent year over year but was down 10.3 percent from February. Lower import volumes also boost GDP numbers.

“A lot of volume came into the ports [in December] but it was pre-staged and didn’t move,” Lawrence Gross, president of Gross Transportation Consulting, told the conference. “Only now is it moving. The import volume has declined [since December], but now it’s moving inland. There’s a reservoir of freight that was waiting to move that is now being tapped.”

“We’ve got hangover effects from tariff disputes,” said J. Bruce Chan, vice president at investment research firm Stifel. “One of my colleagues described the demand market as soft as an old banana. Dry-van, flatbed, reefer, they’re all at best flat right now. This is universal across the the carriers we talk to. Nobody says March and April were stronger than expected.”

There’s still optimism that volumes will pick up, Chan said, “but the amount of time this softness has stretched into second quarter is a little bit surprising. There are a lot of opportunities to purchase [transportation] cheaply right now. We’re at a critical point here in the second quarter. If the market tightens up, we may see a return to a more normal cyclical pattern.”

The addition of truck capacity to the market may blunt that pattern’s peaks this year. Chan and Matt Harding, Transplace senior vice president of data science, argued that smaller trucking companies added much of the new capacity now abundant in truckload markets. “Small fleets overbuy when the time is right,” said Harding, and the time was right in 2017 and 2018.

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