Transportation and logistics rates will largely depend on capacity, fuel, and the overall economy, experts tell LM
Jeff Berman, Group News Editor -- Logistics Management, 2/2/2009
WALTHAM, Mass.—A noted panel of transportation experts recently participated in the 2009 Logistics Management Rate Outlook Webcast, and their analyses of the current economy and freight transportation market provided shippers with some unique insight regarding freight rates and what to expect in 2009 and beyond.
Leading off was James Haughey, Chief Economist of Reed Construction Data, a corporate sibling of LM. In his opening comments, Haughey was quick to point out that it logistics costs will remain low and continue to fall for most of 2009, with costs possibly rising and holding steady towards the end the year and into 2010.
“The situation [shippers had] five or six months ago when you were scrambling to find capacity and the money to pay logistics bills is not coming back for 2.5-to-3 years,” said Haughey. “It is going to be a while.
Haughey explained there are various factors at work today when it comes to today’s rate environment: rates are down due to fuel costs; volumes and inventories are down, which are reducing margins for logistics services suppliers and lowering freight rates; a current period of low credit rates, which is temporary and climb back up in the future; and rising vacancy rates at warehouses, which Haughey said will be a “slack” market for as long as anything else.
And all of these trends that began in 2008 are likely to be reversed over the course of 2009, taking it from a shippers market to a transportation and logistics services providers market.
“This recession is going to last into the summer or early fall, and it depends on how quickly President Obama’s stimulus package money is spent,” said Haughey. “The GDP will drop around 3.3-3.4 percent over five quarters through the third quarter of this year. But this is not the worst economy since the 1930s; this is on par with what happened in the early 1980s. It will be a deeper than average recession, but one that is already showing signs of curing itself apart from what happens in Washington.”
Freight rates and oil: While the price of oil has fallen below $50 per barrel, freight rates have not adjusted to that barometer yet, said Haughey. The $50 rate has been the “market clearing” price for a while, with prices fluctuating above and below it. Haughey expects—as does the Energy Information Administration—that barrel rates will be in the $50-to-$55 per barrel range in 2009-2010, with diesel around $2.30 per gallon.
As a result of this, truckload and less-than-truckload rates may drop 3-to-4 percent by year end and possibly lower this spring and summer, said Haughey. This trend may be modestly up in 2010, but it is not likely shippers will see the higher rates they paid 6-to-8 months ago for quite a while, noted Haughey.
A Wall Street Perspective: As 2008 moved along, dry van truckload miles declined precipitously as did LTL and TL tonnage demand, said John Larkin, Managing Director of the Stifel Nicolaus Transportation and Logistics Group.
Along with tonnage, capacity has fallen significantly on the TL side since its peak levels in November 2004 and May 2006, along with a significant reduction in LTL capacity over the last 6-to-7 months. Other notable factors impacting capacity are the high number of trucking company failures in 2008—with 130-to-140 fleets coming out of the industry—coupled with Class 8 tractor sales in the U.S. continuing to plummet. These sales declines, said Larkin, are largely connected to EPA emissions rules requirements, which would have indicated late 2008/2009 would be fairly robust with high sales for fleets buying new assets, because new rules coming online in 2010 will take nitrous oxide emissions down to zero. An uptick in sales is not expected in 2009, as the overwhelming driver of Class 8 retail orders, said Larkin, has been the weakness in the freight market.
“There is capacity coming out of the LTL industry, but all of the terminals and service centers remain in place,” said Larkin. “This is not the quite the permanent capacity reduction we see on the truckload side.”
Trucking rates: While most truckload rates have remained flat year-over-year, Larkin said there seems to be some feeling that big shippers are afraid there won’t be enough capacity available when the economy recovers and are not willing to leave rates where they are or possibly increase rates slightly for some of their favorite carriers.
As RBI’s Haughey stated, Larkin said that 2009 will not be a great year for carriers, but it could be solid for shippers, especially with fuel prices and surcharges down. But as the year moves along and the economy starts to show recovery—and more capacity is lost—there could be some modest rate increases being filtered in through 2010 and peak in 2011, with 4 percent-type rate increases, said Larkin.
“It is conceivable that rate increases could be more dramatic like in 2004-2005, but it is too hard to predict that,” said Larkin.
On the LTL side, there are carriers in rough financial shape and struggling to hold on to volume, noted Larkin. And in the LTL business, the networks have a voracious appetite volume, with one of the ways keeping volume running through those networks is to lower price, as opposed to downsizing to prosperity, which is what some carriers are doing, explained Larkin. He said this has the potential to remove more capacity from the overall LTL network, and create a more favorable rate environment for carriers as rate increases inch up to 2011-2012.
The story about rail rates: While railroad carload and intermodal volumes have dropped off fairly significantly, it has not resulted in falling rates, said Brooks Bentz, partner in Accenture’s supply chain practice. (Many Class I railroads recently reported during fourth quarter earnings that 2009 rates will be up between 3-to-6 percent)
Part of the reason for this, said Bentz, is that much of the heavy volume that supports the railroad industry—commodities like grain and coal, for example—are on longer-term contracts of 8-to-10 years or longer with built-in rate escalations, which somewhat “mask” what is going on in the marketplace and have an overall effect on what rail rates are doing.
Whether or not the domestic economic recovery will impact future rail volumes is dependent on a few things, with Bentz stating that with inventories down replenishment eventually needs to occur—and this will have a clear impact on railroad and intermodal volume.
While railroad revenues did well in 2008, Bentz said that rates were up in 2008 and will likely aggregately rise a little bit in 2009 at 3-4 percent on the conservative side and 5-6 percent on the more aggressive side.
The possibly of whether the recent re-introduction of legislation pledging to re-regulate the railroad industry and remove antitrust exemptions currently granted will alter the industry landscape is by no means a foregone conclusion, said Bentz.
“Railroads have thrived in an era of deregulation to the point where they have started to earn their cost of capital, which has been painful for some people paying the freight bills and are having to watch rates rise,” said Bentz. “On the other hand, the industry has invested a huge amount of capital into its infrastructure which is a marked contrast to what occurred in the 60s and 70s, when railroad executives invested outside of the industry.”
Bentz concluded by saying that in 2009 rail rates will generally be less volatile than other modes, but will provide an increasingly attractive alternative despite recent increases.
Maritime rate fluctuation: Ocean container shipping likely saw the most dramatic and significant decline—as a result of the economy—in 2008. Volumes trended down throughout the year due to the consumer spending slowdown, with frozen credit markets and ocean rates following suit. As a result, many ocean carriers have been forced to withdraw capacity and take other measures to reduce costs and steady operations.
And as demand dropped, so did trade and as trade dropped in 2009, so, too, did ocean carrier traffic, explained David Jacoby, president of Boston Strategies International, a global supply chain economic consultancy.
Jacoby explained there is a “tremendous correction” occurring in global trade right now, with import and export levels down in the neighborhood of 8-10 percent in 2008. Other contributors include: the U.S. dollar exchange rate dropping and lowering U.S. consumer purchasing power; Chinese labor costs increasing since 2004, raising its consumer price index to about 6 percent and impacting the U.S. Asia sourcing boom; and the U.S. financial crisis and recession helped contribute to imports and exports falling by about 25 percent and 20 percent, respectively, in the second half of 2008, according to Jacoby.
Ocean rates subsequently crashed in 2008 as a result of these conditions, with the most dramatic example being the Dry Baltic (Bulk) Index down by 93 percent, stated Jacoby. On the container side, he said box rates, he said, have fallen to roughly $1,700 per box for Asia to U.S. West Coast routes in December 2007. Rates then went up by mid-2008 when contracts were re-negotiated before they went down again as the market reacted to falling demand by the end of December 2008.
Looking into 2009, Jacoby said capacity is the key to seeing where rates will go. Shippers need to consider that there were 175 mega container ships ordered—35 in 2009, 49 in 2010, and 91 in 2011—according to data from Drewry. Jacoby said this was dubbed as the “illogical ordering binge of 2007,” when it was widely believed that the demand for mega containerships was going to reshape global port reconfiguration and vessel rotation.
“I don’t think anyone anticipated this type of demand crash,” said Jacoby, “right now there are 6,000-7,000 idled TEU (twenty-foot equivalent units) that is 5.5 percent of the world’s fleet. As you look into the rest of 2009, [shippers] need to consider what is happening to the capacity, with a tremendous amount of capacity yet to come off.”
That said, Jacoby noted it is hard to imagine that there will be more pressure than there currently is for lower rates in 2009 with a projected 15-20 percent capacity increase and volumes likely to dip 13-22 percent. Coordinated capacity reduction among carriers, he said, will put a floor on rates, and weak and or highly leveraged carriers may likely fail or be forced to consolidate.
Parcel pickups: Last year, express delivery bellwethers FedEx and UPS released their new 2009 list rates both at 5.9 percent for ground and 4.9 percent for air (and each took 2 percent out of the fuel surcharge and put it into their base tariffs), coupled with the United States Postal Service (USPS) bumping up its annual rate increases to January.
The FedEx and UPS rate hikes were the largest ever announced, said Jerry Hempstead, president of Hempstead Consulting. Part of the reason they were able to do this was because of DHL’s exodus from the U.S. domestic parcel market, effective January 30, 2009.
One notable aspect of these rates increases is how fuel prices are broken down into base rates, said Hempstead.
“A few months ago shippers were seeing a 34.5 percent fuel surcharge for air packages…[but] next week that 34.5 percent will be 1 percent, granted that 2 percent of the 34.5 percent are now ‘baked into’ that base tariff,” said Hempstead. “It is not transparent in that the fuel surcharge is going from 34.5 percent to 1 percent; it is going from 34.5 percent to 3, the 2 percent baked in and the 1 percent you see.”
The bad news about fuel over the past four years is that carriers have been baking fuel charges into their air rates at a 2 percent clip, explained Hempstead. Because of this, the base tariff now has 8 percent of the fuel surcharge baked into it, so even if fuel goes down, carriers will still be able to hold their rates steady. And if fuel prices continue to decline and fuel surcharges drop to an index of zero and continues from there, shippers should negotiate their base rates so that they go down as fuel goes down, he said.
To listen to the complete Logistics Management 2009 Logistics Rate Outlook Webcast, click here.
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