2013 Transportation Rate Outlook: New era of collaboration

While there were few surprises contained in the Institute for Supply Management’s (ISM) December 2012 Semiannual Economic Forecast, the overall findings suggest improvement in the U.S. that will continue in 2013. According to the nation’s purchasing and supply management executives, expectations are for the continuation of the sustained economic recovery that began in mid-2009

Furthermore, the manufacturing sector is preparing for growth in 2013, with revenues expected to increase in 17 manufacturing industries. The non-manufacturing sector predicts that 14 of its industries will see higher revenues.

Capital expenditures, a major driver in the U.S. economy, are forecasted to increase by 7.6 percent in the manufacturing sector and by 7 percent in the non-manufacturing sector.

“Manufacturing purchasing and supply executives expect to see continued growth in 2013,” says Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee. “They are optimistic about their overall business prospects for the first half of 2013, and are even more hopeful about the second half of 2013.”

Holcomb also notes that shippers may expect a slight hike in transportation costs this year, keeping pace with the overall growth projections in manufacturing and services. Meanwhile, our distinguished 2013 Rate Outlook panel tends to agree with Holcomb’s forecast, further advising shippers to monitor macro-economic trends carefully this year.

Due diligence in this regard, along with firming up carrier partnerships, may mitigate the soft spike in logistics and supply chain costs expected to affect their budgets as we make our way through 2013. Any way our panel slices, one maxim rings true: Shippers will have to be more creative than ever if they’re to contain costs this year.

Fuel volatility to continue
Forecasting fuel rates has never been more difficult for the industry overall, maintains Derik Andreoli, Ph.D.c., senior analyst at Mercator International LLC and Logistics Management’s popular Oil & Fuel columnist. According to Andreoli, when planning for 2013 energy fluctuations, logistics managers must keep an eye on several global issues.

“We need to watch what’s going on in Iraq and Iran, wonder if shale gas drilling rates and natural gas production and consumption will remain stable, and ask if drilling rates and production of shale oil increase even as oil wells disappear,” says Andreoli. “These are all questions looming large for shippers this new year.”

Lacking a crystal ball, the best anyone can do is evaluate the fundamentals of global supply and global demand, notes Andreoli. For example, if demand grows faster than production capacity then surplus production capacity—the world’s buffer against actual supply shortfalls—will be diminished, and prices will rise. Conversely, if production capacity grows faster than demand we should expect some easing in price volatility, though not necessarily price levels.

“Over the last two years, surplus oil production capacity has declined from nearly 5.5 percent of world consumption to a hair over 2 percent,” says Andreoli. “In absolute terms, this amounts to only 2 million barrels per day. This means that a disruption in any one of the world’s major producers will have a significant impact on prices. And unless surplus capacity recovers, any escalation of political tensions in any of the world’s major oil producing regions will introduce a significant risk premium and prices will become increasingly volatile.”

Logistics and transportation professionals can begin to reduce their exposure to risk by concentrating on packaging and materials handling, Andreoli advises. “Work with carriers to design an incentive program designed to reward carriers for increasing fuel efficiency,” says Andreoli.

How carriers pack trailers and containers is as important as how shippers pack their boxes, and shipping less air is the goal here as well, he adds. “Outside of packing the trailer, carriers can gain significant fuel savings—close to 10 percent—from switching to single tires, and additional savings can be realized through the installation of aftermarket aerodynamics kits.”

Trucking: Yield management top of mind
Stifel Nicolaus analyst John Larkin agrees that shippers need to take a look at the big picture and should closely monitor the results of the “fiscal cliff” negotiations and broader economic data reports in early 2013. 

“If a rational solution is reached in Washington, chances are that the private sector will be more inclined to hire, invest, and grow at a faster rate than we have witnessed the past couple of years,” says Larkin. “A better than expected economic scenario, along with significantly higher freight rates, could then result.”

Conversely, adds Larkin, if war breaks out in the Middle East, or if China’s growth prospects dim, domestic economic growth could disappoint. In that case, rates could weaken as demand wanes. 
“Rates, particularly spot rates, could decline to very attractive level,” says Larkin. “So rather than reviewing a checklist, we think that shippers should remain diligent in their evaluation of the health of the economy. That discipline will best prepare shippers to respond to the changing landscape while lining up sufficient capacity at reasonable market-based prices.”

Larkin and other analysts note that trucking rates are closely related to supply and demand in the marketplace. Assuming that the economy continues to grow at an annual rate of between 1.5 percent to 2 percent shippers should expect supply and demand to remain roughly in balance. 

“This is the same situation we have experienced for the better part of two years,” he says. “Under this scenario, truckers should be able to eke out 1 percent to 2 percent annual increases in raw price in 2013. Carriers may be able to improve on the range by 100 to 200 basis points harnessing a process we like to call ‘yield management.’”

Yield management is nothing more than selecting the highest rated customers and the highest rated freight offered by particular customers. Furthermore, Larkin believes it’s possible that the mid-year change to the hours-of-service-related restart rule could effectively eliminate 2 percent to 4 percent of the industry’s capacity. This alone could set up a capacity shortage which could drive significant upside to the modest rate increases mentioned above.  

“Shippers can help themselves tremendously by working collaboratively with carriers to improve the carriers’ equipment utilization,” says Larkin. “Whether a shipper can open his facility for nighttime delivery, quickly load and unload trailing equipment, or communicate equipment needs well in advance…carriers will be more inclined to work with the collaborative shipper on price because some of the margin needed by the carrier can be derived from turning the assets and the drivers more quickly.”

Rail/Intermodal: Transparency is key
Brooks Bentz, a partner in Accenture’s supply chain management practice, says that intermodal shippers can shield themselves from unexpected rate hikes by negotiating contracts for a distribution network rather than by picking lanes.

“Shippers really became good at this during the recession,” says Bentz, “and they’ll continue to share information with one another—even with friendly competitors—if it’s of mutual benefit.”

Indeed, Bentz argues that the carriers themselves are becoming more transparent in their pricing. “Given that a wide variety of rail and intermodal producers are charged with delivering door-to-door transportation, the challenge has been magnified,” he says. “That requires more integration and cooperation among carriers.”

Meanwhile, intermodal growth continues to accelerate with the tremendous investments the railroads are making in infrastructure. According to the Intermodal Association of North America (IANA), domestic container volume recorded double-digit growth for the fourth quarter in a row in 2012.

“Every IANA region reflected an increase in domestic containers which were responsible for the majority of total third quarter intermodal gains,” says IANA President and CEO Joni Casey.
Volumes were most impressive in the Midwest and the Northeast regions, with each recording nearly a 15 percent uptick. Overall, intermodal volume increased a respectable 3.2 percent during the fourth
quarter that exhibited some economic slowdowns.

“The largest overall cause of modest international intermodal volume increases continues to be weak port volume, as many shippers have been unwilling to bring in substantial inventories,” says Casey.

“Strong domestic container gains have kept overall intermodal volume growth positive, and an anticipated rebound in imports should deliver higher levels of overall intermodal performance in 2013.”
Yet to be measured, add analysts, is the impact the threatened strike on East Coast and Gulf ports may have had on ocean carrier deployments late last year. While labor and management continue to hammer out a deal in January, carriers may have already imposed a surcharge on shippers for sudden supply chain shifts.

Ocean: Capacity crunch on horizon?
As always, the freight rate outlook for container shipping will vary by route and by direction and will depend on the length of contracts, says analysts for the London-based consultancy Drewry Supply Chain Advisors.

“Overall, we predict a moderate increase in freight rates in 2013 of 3 percent to 6 percent in average east-west freight rates in 2013,” says Philip Damas, Drewry’s director. “Contract tenders currently being finalized for calendar 2013 also indicate this type of rate changes.”

The fact that rates may rise in a weak market is partly because of the lag time of annual contract rates, he explains. In early 2013, annual contract rates that commenced in early 2012—at a time of a price war between ocean carriers—will expire. Slightly higher rates, adds Damas, will then replace these very low contract rates.

“Shippers who buy shipping capacity on a spot basis or under short-term contracts have been paying significant rate increases since the summer of 2012,” says Damas.

“In effect, these shippers have already seen price increases from which annual contract shippers have until now been insulated.”

The fuel surcharge component of container freight rates will remain high in 2013 in line with the underlying marine fuel price trends. However, the container shipping market remains unstable, Drewry analysts say.

“We note that carriers have been losing money in 2011 and 2012 and are close to the point where they will need to reduce capacity to protect their cash flow,” says Damas.  “If the situation worsens, we could see a repeat of 2010 when capacity was slashed, freight rates were ratcheted up, and contracts were renegotiated.”

So, how do shippers protect themselves? Drewry generally advises them to develop close relationships with core, preferred carriers, and to run detailed professional tenders, instead of trying to capitalize on attractive, short-term price reductions from unfamiliar or “opportunistic” carriers.

“We say this because of the continuing disruption in the market, which could result in the interruption of service, or in sudden freight rate increases, or in unilateral contract terminations,” advises Damas. “Just look at the speed at which some small transpacific carriers pulled out of the market, with little or no notice, when rates fell.”

Air Cargo: Rates remain steady
While air cargo volumes crept along at a snail’s pace during most of 2012, the year ended without a last minute push for higher-value retail goods to fill space to capacity on cargo planes.
According to Charles “Chuck” Clowdis, managing director of transportation advisory services for IHS Global Insight, this slow growth still reflects rates that have remained stable for most of the past year.

“Even the dockside strikes at seaports last year did not last long enough to push goods from sea to air as inventory carrying stocks may have become threatened,” says Clowdis. “It’s our feeling that rates will continue to remain at present levels during the first quarter of 2013 and likely remain so unless there is a discernible economic recovery that will include robust consumer spending.”

Clowdis predicts that mid-year spending may see a bit of an upturn for airfreight items if new electronic items are released. Meanwhile, he contends that some hope for a recovery exists for this summer.

“Likewise, consumer spending on relatively high value goods could return with a rise in the economy,” says Clowdis. “But this scenario is unlikely. Six months into 2013 will find us most likely awaiting a change in the economic situation hopefully coupled with a drop in unemployment.”

Parcel: Still surging
Late last year both FedEx and UPS announced parcel rate hikes, but according to Jerry Hempstead, president of parcel consultancy Hempstead Consulting, increases are “not linear by weight nor are they linear by zone.” FedEx also increased many of the most frequently used accessorial service charges such as residential, address correction, delivery area, and extended area surcharges.

“The great concern to most shippers is the constant increase in ‘minimum’ charges,” says Hempstead. Today the minimum charge for a ground package is $5.49 before the fuel surcharge, that will be increasing to $5.84, a 6.34 percent increase not accounting for the change in the fuel surcharge.”

The United States Postal Service, a competitor in the two- to three-day air market also increased rates late last year. “But there is little overall organic package growth going on in the marketplace,” says Hempstead. “As a result, they need to continually increase top line revenue by charging more.”

So what can shippers do? They can protect themselves by developing a model that reflects buying patterns of services and distribution of packages by zone and weigh. “This is easily accomplished by downloading a shipment history from the carrier web site,” says Hempstead. “Always remember that everything in life is negotiable. If you have grown your business with a carrier this past year then perhaps the carrier should be rewarding you with lower costs in 2013.”