US spot truck pricing seen near inflection point

US spot truck pricing seen near inflection point

US shippers have pricing power over truckers now, but their advantage may slip away by the end of 2019, Coyote Logistics warns. Photo credit: Shutterstock.com.

With spot truckload pricing close to 20 percent lower than a year ago, and contract rates either rising slightly or falling, US truck shippers might be tempted to pull back on some of the commitments they made last year to become “shippers of choice.” They should avoid that temptation, says Chris Pickett, chief strategy officer for UPS subsidiary Coyote Logistics.

“Stick with whatever strategy you put in place last year,” Pickett advised shippers in a webinar on Coyote’s second-quarter market update and forecast. “The shipper of choice bandwagon is a very healthy one to be on, regardless of where we are in the cycle. It creates a strong incentive for change, and people are looking for innovative ways to drive service and capacity.”

The cycle is somewhere near the bottom of a steep deflationary slide that began last autumn and continued through the first quarter. The brokerages’ Coyote Curve Index reading at the end of the first quarter was negative 20.4 percent, its lowest level yet, and much deeper in negative territory than the negative 6 percent index reading Coyote reported in the fourth quarter.

Coyote had predicted its index would drop to a reading between negative 5 and negative 10 percent in the first quarter, but the actual deflation in truck pricing was much steeper and quicker. Pickett gave three potential reasons: an industrial economy that is expanding more slowly, the fading impact of electronic logging devices (ELDs), and a significant influx of new truck capacity.

The Coyote Curve Index referenced the massive spike in heavy truck net orders in late 2017 and in mid-2018. IHS Markit data shows those orders are turning into capacity on US highways, with new truck registrations up 20 percent year over year in the first two months of 2019. That build-up in capacity keeps a lid on truckload rates even though demand is still there.

Low end of truck pricing cycle

But in pricing, what goes down eventually turns up. Truck pricing is highly cyclical, and we’re now in the fourth deflationary period since the recovery from the 2008-2009 recession began, Pickett pointed out. The pricing power shippers have gained since the second half of 2018 may be short lived compared with the “soft patch” that began in late 2015 and lasted into 2017.

“With a [negative 21 percent] reading in the first quarter, we believe we still have one more quarter to go before we hit our inflection point and turn back toward inflation land,” Pickett said. He expects spot market truckload rates to shoot up in the fourth quarter of 2019 or in the first quarter of 2020, and to peak in late 2020 or early 2021. That will once again lift contract rates higher.

“If you’re a buyer, the good news is you won’t exceed your 2019 freight budget because of spot market exposure,” he said. “And assuming you went to market [with contract bids] in 2018, it’s unlikely that you’ll miss budget because of any unexpected explosion in the spot market. The spot market may represent an opportunity to the buy side [shippers] this year.”

Contract rates will continue to drop over the course of 2019, he predicted. “If you have unplanned freight flows that aren’t contracted, there may be opportunities to go out on the spot market,” Pickett said. “You’ll probably go very shallow in your routing guides, and you should expect record tender acceptance. Unplanned seasonal dislocations will be muted.”

But the clock is ticking on all these opportunities. Coyote estimates the spot market becomes inflationary about three quarters after an inflection point. And although the brokerage and logistics firm expects that inflection point in this quarter, it may have happened in the first quarter, Pickett said. Inflection points are difficult to recognize until a quarter or so has passed.

In 2018, when record freight demand and tight truck capacity shredded transportation budgets, “people argued this too shall pass,” Pickett said. Although shippers have regained pricing power, “I’d argue the same in 2019,” he said. History doesn’t always repeat itself, “but it does tend to rhyme. I’d resist the temptation to run a victory lap.”

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