UP OR DOWN
Once, when an elevator door opened, I asked, “going up or down”? The person in the elevator thought about it for a few seconds and then responded “yes” as the doors closed. That’s pretty much the way the market sees freight rates as we enter 2020. Shippers would be prudent to look at what various areas of the economy are trying to tell us today, as they attempt to set expectations for freight costs, equipment, availability, and fuel. You will quickly see a disparity depending where you look.
In 2019 we saw a slowdown in both manufacturing and trucking compared to 2018. According to the American Trucking Association, American Trucking Association’s’ advanced seasonally adjusted ‘For-Hire Truck Tonnage Index’ increased 3.3% in all of 2019, about half the annual gain in 2018 (6.7%). Many predict weaker freight demand, which could result in more tepid rate increases. Others are waiting to see how long it is going to take to feel any significantly positive effects from rate cuts by the Federal Reserve, which typically take 6 – 9 months to impact components of GDP. At the same time, DAT Solutions, which operates a load board, forecasts truck availability to be more constrained in 2020 compared with 2019 and anticipates a rebound in spot market rates. They are expecting van rates up 4% to 6% in the second half of 2020. Contract rates should climb about 2% as the consensus reached last year on a phase one trade agreement should bear some fruit for the economy in 2020. The deal commits China to purchase $50 billion in American agricultural products over the next two years.
When looking at fuel costs, a big unknown is the impact of the new International Maritime Organization rule that went into effect on January 1st. It requires global shipping companies to cut the sulfur emissions from ocean vessels dramatically. This can be done either by cleaning up or replacing bunker fuel, the sulfur-rich residue left over once refineries have made gasoline and diesel that ocean vessels have burned for years. Some trucking firms worry that a switch among maritime operators to Ultra Low Sulfur Diesel from bunker fuel would put pressure on ULSD supplies and prices for trucking companies.
Derek Leathers, CEO of truckload carrier Werner Enterprises Inc., said “I’ve seen people say they think it’s a relatively nonevent. I don’t agree with that. I’ve also seen people talk about 70 cents- to $1-type spikes in diesel. I think that’s a bit overstated. I think somewhere in that goal post is where it falls out.” U.S. Energy Information Administration anticipates the effects on petroleum prices will be most acute in 2020, and then will be moderate after that.
North American Class 8 truck production is expected to plunge compared with 2019, by more than 100,000 units to 224,000. This is below the typical North American replacement level. Troy Clarke, chairman and CEO of Navistar International Corp, feels if GDP growth is near 2% “freight demand and shipping capacity are pretty balanced, reducing the need to expand fleets.”
So you see, up or down is a matter of your perspective. If you are looking for support in determining how to best manage your transportation costs, contact Harold B. Friedman at 609 577 3756 or [email protected].