US truckers' pricing power receding

US truckers' pricing power receding

US long-haul truckload pricing growth is expected to slow from 8.2 percent in fourth quarter 2018 to 2.15 percent by fourth quarter 2019, according to the IHS Markit Producer Price Index for the sector. Photo credit: Shutterstock.com.

The pricing power held by trucking companies in 2018 will likely diminish in 2019, but not disappear. Thanks to healthy freight demand and uncertainty about future capacity, trucking firms still have pricing leverage over their shipper customers, despite an eight-month slide in spot market truck pricing, various economic indices and comments by shippers show.

The latest Cass Freight Index, along with reports from the American Trucking Associations, Truckstop.com and DAT Solutions show a rather stable US transportation industry on a route to continued but slower growth in 2019. That still could mean “higher than average” expansion, with the trajectory of contractual shipping rates bending downward later in the year.

A trucking sector pricing analysis from IHS Markit, the parent of JOC.com, makes a similar forecast. The IHS Markit Producer Price Index for the US long-haul truckload sector shows year-over-year pricing gains slowing from 8.2 percent in the 2018 fourth quarter to 2.15 percent by this year’s last quarter, according the company’s Pricing and Purchasing Service.

Long-distance less-than-truckload (LTL) fares a bit better, with year-over-year percentage change in the IHS Markit PPI for the LTL sector dropping from 4.89 percent in last year’s fourth quarter to 2.98 percent by year’s end. The LTL index peaked with a 7.79 percent increase in the second quarter last year, while the long-haul truckload PPI’s highest annualized gain was a 9.07 perent increase in the third quarter.

Lower gains are still increases, however. Most shippers expect to sell and ship more goods in 2019, and they anticipate higher, not lower, shipping and logistics costs, according to comments made during recent fourth-quarter earnings calls. Freight and logistics costs “remain high, but stable,” Patricia Little, chief financial officer of The Hershey Company, said Jan. 31.

Although freight costs have “stabilized,” they haven’t stabilized “at a better number,” Little told Wall Street analysts in an earnings call transcribed by Seeking Alpha. “Going into 2019, we don't see a real reduction in those [costs],” she said. “We think we're doing a good job of optimizing freight and logistics, but there's still a base level of inflation in that.”

The Coca-Cola Company had a slightly fizzier outlook. “Let’s draw a line because the good news is 2018 has ended,” CEO James Quincey said during a Feb. 14 earnings call. “While freight costs are expected to remain above historical levels, we do not expect to see the same level of year-over-year increases as we saw last year,” he told investment analysts.

“I would expect based on what's happening ... we're going to be in better shape from a transportation point of view as we go through the year,” Walmart president and CEO Doug McMillon said in the retailer’s Feb. 19 earnings call. “And it is helpful that gas prices are in the range that they are in and we hope that continues to be the case.”

“Stabilizing patterns” are visible in “almost all of the underlying freight flows,” Donald Broughton, founder and managing partner of Broughton Capital, said in the monthly Cass Freight report for January, which he authored. Recent declines in shipment volumes and shipper expenditures are off all-time highs set in late 2018, Broughton points out.

Annualized comparisons are increasingly difficult because 2018 was such a strong year, he said. The Cass report now looks back two years for a comparison with freight activity before the US economic surge in late 2017 and 2018. Although shipments in January were down 0.3 percent year over year, they were up 12.2 percent from a much softer January 2017.

On a monthly basis, shipper expenditures dropped 4 percent, but spending was still 7.8 percent higher in January than a year ago and 21.3 percent higher than in January 2017, an indicator of how significant the surge in pricing, especially truck pricing, has been since mid-2017. The Cass Truckload Linehaul Index, which tracks pricing, rose 6.4 percent in January year over year.

“The current levels of volume and pricing growth are suggesting that the US economy is still growing, just not at the rate it was, and that it may have reached its short-term expansion limit,” Broughton said. “It is clear that 2018 was an extraordinarily strong year for transportation and the economy,” and that will skew year-over-year growth comparisons in 2019.

Truck tonnage, spot loads pick up

Truck tonnage increased 2.3 percent month over month and 5.5 percent on an annualized basis in January, according to ATA, indicating further growth in freight demand on top of a record-breaking 2018. “I was very pleased to see this rebound” from a 1 percent tonnage decline in December, ATA chief economist Bob Costello said in a statement Feb. 19.

“But we should expect some moderation in tonnage this year as most of the key sectors that generate truck freight tonnage are expected to decelerate,” Costello said. In 2018, the for-hire truck tonnage index increased 6.7 percent over 2017, the largest annual gain since 1998. The January index reading of 117.3 is ATA’s highest since recently revising the index.

The volume index of the ACT Research For-Hire Trucking Index rose from 49 in December to 52 in January, indicating an increase in truck volumes. The ACT index works like the Institute of Supply Management's PMI manufacturing index: Any reading of 50 or above indicates expansion. The ACT driver index for January came in at 47.2, but while negative that reading is a big improvement over the 38.6 reported in January 2018. 

Like buds breaking through the snow, the first indications of seasonal change in the spot market may have appeared. Both DAT Solutions and Truckstop.com report some tightening of capacity in advance of produce season. Spot dry-van prices “rose on steady volumes for many high-traffic van lanes” in the week that ended Feb. 16, DAT Solutions said Tuesday.

That slowed the seasonal decline in national spot rate averages, with the national dry-van average falling by only a cent to $1.90 per mile, including fuel surcharges. The DAT average dry-van spot rate is now back to its Sept. 2, 2017 level, the starting point for the long run-up in spot rates following hurricanes Harvey and Irma in August and September of that year.

Data from Truckstop.com may indicate capacity on the truckload spot market is relatively tighter for vans and slightly looser for refrigerated and flatbed equipment. “The market could be discovering a new post-crisis equilibrium that should persist if the economy remains strong,” Truckstop.com said. Van shipments posted on its load boards increased in early February.

Truckstop.com’s national average dry-van rate spot rose 4 cents to $1.84 per mile in the week that ended Feb. 17, after spending three weeks at $1.80. At the start of the year, the average was $2.12 per mile, down from a high of $2.69 per mile in the week that ended July 1, 2018. The company’s dry-van average hasn’t been in the $1.80 per mile range since May 2017.  

 

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