2008 Outlook for Freight Rates
The past two blogs have focused on the difficult economic conditions facing the freight industry and then identified a set of indices that can be monitored to see if we are pulling out of the so-called “freight recession.” With the U.S. Federal Reserve having cut interest rates twice in the past week and with U.S. Federal Government talking about a stimulus package, aggressive action is being taken to turn the economy around and improve freight volumes. However these measures take time to work their way through the economy. All indications are that for at least the first six months of 2008 and probably longer, freight volumes will remain depressed.
The following are some projections made by a distinguished panel of experts that Logistics Management magazine assembled for a recent webinar. These projections are correlated by industry segment (e.g. truckload, LTL, rail etc.) to the research findings derived from a representative sample of Canadian shippers in a recent Canadian Transportation & Logistics magazine survey.
The growth in U.S. GDP is expected to slow considerably. The LM panel projected a very modest 1.1% growth in GDP in the United States in 2008, well below last year’s level of 4.7%. Diesel fuel is still expected to remain high although this is always somewhat of a “wild card”. The freight industry will continue to be adversely affected by the slowdown in home construction and the home resale market (brought on by the sub-prime mortgage and credit crunch), the related decline in sales of appliances and home furnishings and the drop in auto sales. This will have a significant impact on the pulp and paper industry, retail traffic and auto parts manufacturing. What does this all mean for freight rates?
U.S. truckload rates are expected to increase by 3.5% in 2008. If you exclude fuel, truckload rates are expected to decline by 2 to 4%. In the Canadian survey, 73% of the shippers expect rate increases in the range of 1 to 4%, very comparable to their U.S. counterparts. In the truckload sector, it will again be a shippers’ market. While capacity may tighten as a result of carriers parking equipment, mergers, acquisitions and bankruptcies, there will still be ample equipment to move the freight in 2008.
In the United States, LTL rates are projected to increase by 2.1% in 2008, well below the 4.8% figure of last year. Again, if fuel is excluded, LTL rates are predicted to decline by 1 to 3%. In Canada, 73% of the sample is expecting a rate hike of 1 to 4%. LTL capacity is expected to be satisfactory as U.S. based non-union regional LTL carriers expand their coverage areas. LTL carriers are marketing consolidation and storage programs in their terminals to utilize excess capacity.
Carload rate increases are expected to be 5.5% in the United States as compared to 2.5% in the intermodal sector. In Canada the picture is similar. Seventy-one percent of shippers expect rail rate increases of 1 to 4% while 70% expect increases in this magnitude on intermodal rates. The rationale for these higher rate increases is based on the smaller number of class 1 railways (2 U.S. east coast, 2 U.S. west coast and 2 Canadian rails), thereby giving them more pricing leverage, the need to cover the cost of their service improvements and their need to earn in excess of their cost of capital to justify continued investment. With some truck capacity coming out of the market, this makes intermodal a viable option, in some instances, on freight moving distances of 400 to 500 miles and up.
Marine rates on U.S. traffic are expected to increase by $100 per container during the course of 2008. Sixty-two percent of Canadian shippers are looking for increases of 1 to 4% while the other 38 percent are expecting higher increases. There appears to be ample capacity in 2008. Since the land portion of the freight movement is quite costly in comparison with the ocean piece, there are expectations that short-sea shipping (e.g. Houston to Savannah) will become more prevalent to reduce long haul trucking costs.
This market is really composed of a number of market segments (e.g. deferred parcel, express parcel, mail services) that in some cases have different players and market leaders in each segment. In the United States, there is much discussion at this time as to the future of DHL. While they are a big player on a global basis, they have not performed well financially in the United States. With the U.S. post office becoming unregulated in this space, this will increase competition with the big three (UPS, Fedex, DHL). The “tug of war” between shippers and carriers should keep rates relatively flat in the United States. In Canada, 75% of the shippers surveyed expect rate increases of from 1 to 4%.
This is a very cyclical business with well defined peak and off-peak seasons. During peak season, air carriers and forwarders have more leverage. Also, fuel is a very large percent of their expenses. Canadian air cargo rates are projected to increase by 1 to 4% by 63% of the respondents while the balance expects increases of more than 4%.
The year 2008 is going to be a challenge economically in both the United States and Canada. The rates pendulum will be more favourable to shippers. Here are some things to consider. As reported in a previous blog, the tough times will come to an end. As business picks up, capacity is expected to tighten considerably. This will drive up freight rates significantly since it will take time to bring back capacity to the market. Shippers should focus on their high quality core carriers. They should negotiate rates that are fair to be both sides and sign multi year relationships to lock in capacity for their company when the economy starts to pick up.