Endurance Test (page 2)
-- Logistics Management, 1/1/2006
Page 2 of 2 -- If truckload rates see any improvement in the first and second quarters of 2006, it will be due to fuel prices coming back down after spiking abnormally high in the second half of 2005, says Paul Svindland, senior director of the Global Logistics Solutions Group at ICG Commerce, a logistics outsourcing firm in King of Prussia, Pa. Large shippers, though, may be able to keep base-rate increases to 2 percent to 4 percent in 2006 if they are willing to change carriers, hesays. That's because a shipper facing a hefty rate hike from its regular provider could negotiate lower rates with another carrier and thereby minimize the percentage increase, he explains.
LTL rates, meanwhile, are unlikely to experience increases of the same magnitude as truckload, Sanderson predicts. He sees plenty of capacity and enough competitive options in the LTL sector to hold rate hikes in check.
Rail capacity out of steam
The outlook for rail pricing mirrors that of the truckload sector. For the first time in decades the rail industry has run out of capacity. Record international trade volumes, early retirements, general shortages of both labor and equipment, and infrastructure constraints explain why rates have been increasing and aren't likely to fall anytime soon.
Class 1 railroads could hike rates by 8.4 percent in 2006 following an estimated 8.5 percent increase in 2005, says Dr. Leigh B. Boske, economics professor and associate dean at the University of Texas at Austin. Sanderson also expects intermodal rates will rise on par with those for the truckload market, up 4 percent to 7 percent. The main causes, he says, are congested rail yards, shortages of boxcars, and trains "filling up with priority customers like Wal-Mart and UPS, leaving everyone else to fight over the remaining slots."
In the highly concentrated parcel express market, the days when shippers with $10 million or more in business could negotiate deep price cuts may be over—at least for now. When DHL merged with Airborne, the cash-rich company was willing to forego profits to win business away from FedEx and UPS. Now, says Svindland, "DHL is wiser about the business and wants to go after good margins."
With the strong economy boosting shipment volumes, FedEx and UPS are sparring on a market-by-market or account-by-account basis, careful to avoid an all-out price war. In November, UPS announced an average 3.5 percent hike in ground parcel prices for 2006, and FedEx Ground followed with an identical increase. Wall Street analysts say they expect DHL will soon follow suit, but at press time the carrier had not yet done so. In the air express side of its business, FedEx plans an average 5.5 percent price hike for international shipments to or from the United States—the biggest price increase in at least nine years.
While truck, rail, and air rates will continue to climb in 2006, ocean freight rates will buck that trend. Mark Page, research director for Drewry Shipping Consultants Ltd. in London, says that the container shipping market is being driven by an oversupply of capacity now. "For the first time since early 2002, a significant quantity of new vessels is being delivered from world shipyards," he says.
Drewry estimates that total effective capacity in the container market will rise by 14 percent in 2006, while effective demand will weaken from the very high levels of the last three years to a 10.7 percent growth rate this year. For the main east-west trade routes (Trans-Pacific, Asia-North Europe, and Trans-Atlantic), Page forecasts average rates will fall 6.1 percent in 2006. That follows increases of 17 percent in 2003, 7.5 percent in 2004, and 3.6 percent in 2005. (See Figure 4.)
A similar trend on routes from South America to the United States is likely this year. After a brutal marketplace in 2004, when rates surged by up to 40 percent, ocean carriers were disappointed in 2005 that shippers were able to avoid peak-season surcharges. For 2006, Svindland expects northbound rates will slightly decrease for most shippers; small shippers may possibly see minimal rate hikes. Creative Contracts
With every mode but ocean shipping looking at another year of significant rate hikes, it looks like the seller's market will prevail again. Of particular concern is the truckload sector: Even if shippers are able to negotiate lower rates, there's no guarantee they'll be able to keep them for long. "[Truckload carriers] will drop you if they see an opportunity for 10 cents more per mile, and then your negotiated rate won't mean much," observes Svindland.
In response to such turmoil, more shippers may be turning to private fleets. "Manufacturers and retailers don't want to be in the trucking business," says Sanderson, "but they have to do something to insulate themselves from high rate increases."
The transportation landscape is indeed changing as buyers become more creative, says Svindland. On behalf of its shipper clients, for example, his company is developing more contracts that include incentives for on-time delivery and pickups.
Norbridge's Lee Clair counsels shippers to be more creative across the board when it comes to managing their costs in the coming year. To take full advantage of cost-saving opportunities, shippers may need to make changes in their distribution networks, in the modes they choose, and in the hours they work, he suggests.
They may even need to change their attitude. Clair cites the example of IKEA, the home-goods retailer. Logistics executives at that company were concerned about the truck-driver shortage and decided that one way to ensure adequate capacity and lower costs would be to become the most attractive customer to its motor carriers.
There's no question that maintaining high-quality service while keeping transportation costs under control will entail plenty of hard work. But shippers that are able to meet that challenge will be well prepared for anything that may come down the road in 2007.
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