Rates in the $320-to-$360 billion truckload market will continue their sharp rise this year because of surging demand in some sectors to replace depleted inventory as well as sharply rising costs for carriers.
Read the original post on Logisticsmgmt.com

By John D. Schulz · February 15, 2021Rates in the $320-to-$360 billion truckload market will continue their sharp rise this year because of surging demand in some sectors to replace depleted inventory as well as sharply rising costs for carriers.
That’s what leading TL executives and analysts are telling LM as they assess the freight market’s largest sector this year. 

“It’s a good time to have trucks and it’s a good time to have new trucks,” Derek Leathers, vice chairman, president and CEO at Werner Enterprises, the nation’s seventh-largest truckload carrier, told LM. Werner’s fleet of 8,000 tractors is only two years old on average. Its 24,000 trailers average four years. Those truck counts are down about 3.5 percent from this time last year, he said.

“It’s a good time to be in that situation because it’s going to be hard to get new trucks and trailers if you want incremental growth in your fleet,” Leathers said.

The reason is backlogs of orders at the major Class 8 truck manufacturers. Plus, they cost more. Various other operating costs from tolls to insurance to surging driver pay – the highest increase most TL carriers will face this year – are squeezing TL carriers.

And after more than a year of declining crude oil prices which kept diesel prices low, they are creeping up to around $3 a gallon.

Brent-crude oil prices were hovering around $60 a barrel at press time – their highest point in over a year. There’s really no explanation other than, even as coronavirus worries have dampened demand, producers from the likes of Iran and Russia have managed to limit supply and gain rate increases. Beaten-down energy stocks such as Exxon Mobil and ConocoPhillips are some of the best performers in the stock market this year.

And truckers, who consumed approximately 54 billion gallons of fuel last year, are paying the price. About 94 percent of the nation’s 3.5 million Class 8 trucks use diesel, consuming about 40 billion gallons of diesel last year.

Shippers nearly always pay for that increase. Thanks to the nearly universal fuel surcharge mechanism – adjusted every Monday using the on-highway survey of diesel prices conducted by the Energy Department. The Feb. 8 nationwide diesel price was $2.80, down about 10 cents since this time last year. But that doesn’t reflect the newer, higher costs of diesel that should be at the pump within the month. Crude oil costs make up about 42 percent of the total price of diesel, according to the Energy Department.

“Fuel is going up,” Leathers said flatly. “Politics aside, the financial aspect (of the oil industry) is setting the stage for higher rates.”
That’s because Exxon Mobil’s net loss in the 2020 fourth quarter was in excess of $20 billion. Other major oil companies suffered rare losses, although not as high.

“Tolls are going up, both existing and future,” Leathers added. “But the highest increase is driver pay. There is a lot of pressure on the cost side, and rates are going to have to reflect that.”

Leathers added there is a lot of stimulus money being spent and he anticipated Gross Domestic Product (GDP) growth in excess of 4 percent this year.

The unusual supply-demand cycle of 2020 played havoc with most carriers’ advanced planning. After the economic shutdown last spring caused a 17 percent drop in GDP in the second quarter, the economy rebounded the rest of the year, albeit unevenly.

That continued through the end of the year, and is reflected in the up-and-down unevenness of the American Trucking Associations’ monthly truck tonnage indexes.

Last October, the index unexpectedly fell 6.3 percent. But that was followed by a 3.7 percent rise in November and an unusually strong 7.4 percent increase in December, usually one of the slower months of the trucking calendar.

Trucking costs have been rising since mid-2020. Carriers became more finicky with whom they chose to do business. Another factor was COVID’s ability to ruthlessly expose U.S. supply chain vulnerabilities.

Around the world, companies large and small are urgently seeking ways to better plan around supply chain demand volatility. Everyone is searching for improved resilience and agility.

 And they’re paying for it.

Truckload rates, when compiled from a blend of both spot and contract, were up slightly more than 10 percent last year. Spot rates were up in the low double digits in the fourth quarter, and contract renewals ran only slightly behind that, top analysts and executives estimate.

“Wages are still going up, and there’s a need for a lot of these companies to become more financially healthy,” Werner’s Leathers said. “They are not covering their cost of capital.”

The truckload markets reached what DAT Analytics, a research firm, called “an inflection point.” That is where dry van and reefer contract rates are now higher than spot rates for the first time in seven months. But spot rates have also found support at their current level, DAT said, as prices hold steady while shippers restock warehouses with spring inventories ahead of Chinese New Year.

Anticipated strong consumer spending is expected at least through the first half of this year. Recent Bank of America card spending data were up a torrid 9.7 percent year-over-year. Consumer spending makes up about 70 percent of the U.S. economy.

“In our business, the strength of freight has stayed constant since October,” Leathers disclosed. “We usually see a small dip in January and a larger one in February. This year we didn’t see any drop at all. Freight remained strong. People need to restock inventories. That should keep freight levels strong well into the spring.”

Then, there’s the debate over whether another round of cash payments – tentatively set at $1,400 for a taxpayer earning $75,000 or less a year – would spur more consumer spending as occurred last year.

Experts say don’t count on that. That’s because most of the $2,000 in the last stimulus was spent on durable goods, which rose 11% year over year in December compared with February. Non-durables such as food, gasoline and clothing were up just 2.3% over that span.

Economists are saying U.S. consumers probably won’t really unleash their wallets and pocketbooks until they feel better about the economy – which translates into getting the pandemic under control. Vaccines are expected to arrive in greater supply by late spring.

Trusted by some of the biggest brands

We have reduced shipping prices for over 3,000 global companies including the top names in entertainment, retail, automotive, electronics, clothing, farming, home, and agriculture.

Earth Only

We’re Waiting To Help You

Get in touch with us today and let’s start transforming your business from the ground up.