2019 was a Shipper’s Market
Record truck orders and record freight volumes in 2018 served as the backdrop for a significant correction to the market in 2019. The year began with a plethora of trucks and freight volumes underperforming expectations. It is estimated that there are approximately 75,000 more tractors available than there is freight to fill them.1 Shipments became easier to cover, and as a result, carrier rates were historically low. Even though economic growth continued in an upward trajectory, it was at a much slower pace than the previous year and not enough to compensate for the overabundance of equipment.
According to DHL’s Pricing Power Index, a gauge that determines whether pricing favors the carrier or the shipper, Q4 continued to be a shipper’s market. In other words, the trucking market remains soft. Ample capacity reigned in October with only a slight tightening in November, and as we approach Christmas week, trucks are finally becoming increasingly busy.
Spot volumes for vans have been up 25% over last week, hitting an 11-month high. National freight volumes surpassed those in 2018 for the second half of the year, but it still isn’t keeping pace with the overabundance of trucks. In October, we saw a 1% growth over 2018 volumes, but as aforementioned, with an excess of assets, the impact on capacity was much less noticeable than in prior years.
More trucks than freight create single-digit outbound tender rejection rates as well, which hit an all-time low of 2.42 percent this past week from 3.88 percent the prior week. Truck orders are often indicative of confidence in the market, and the numbers this year were encouraging, at least up until October. The tenth month produced less-than-stellar truck orders, the lowest, in fact, since 2016 and 51 percent lower than in 2018.2
The Market Demand Index (MDI) chart below shows the ratio of loads posted to the number of trucks posted. As you can see, the last few weeks of the year are trending upwards with expected seasonal freight.
According to CCJdigital.com, “The gap between contract and spot rates this year has been about 18 cents per mile, and October data suggest contract rates could fall another five to ten percent early into next year,” said ACT Research President Kenny Vieth.
An abundance of capacity has helped create spot rates that are lower than those of last year during this same time (no surprise there!), but still higher than they were in 2016 and 2017. Contract rates are down about two percent for the year. Spot rates have even dipped below many contract rates, which makes contract renewals difficult to negotiate.
Intermodal, Ocean, and Air
The intermodal market in Q4 is keeping in line with the over-the-road market. Intermodal spot rates have increased year over year, but volumes, like trucking earlier in the year, are down. Next year, forecasters predict low, single-digit growth for both intermodal and ocean freight. Air cargo numbers are down as well, mirroring trucking and intermodal volumes.
Economic Factors affecting the market
Industrial production is slightly down after three consecutive months of growth. The housing segment fell 9.4% month-over-month in September but rebounded in November, winding up at 1.6% growth year-over-year. The overall economy appears healthy, with employment trends favorable and wages up. Consumer confidence is stable and has been a significant contributing factor in elevating the market.
What to Expect in 2020
2020 will bring with it many of the same challenges the industry faced in 2019, but some new ones too.
The Driver Shortage
The driver’s shortage has been like crying wolf. We have been hearing about it for several years now, and the bottom line is, it hasn’t been that bad. But hold on to your hats for 2020! The Drug and Alcohol Clearing House is set to go into effect in early January, and this time, it is a real threat to creating the driver shortage that was predicted. It could put as many as 300,000 drivers out of commission next year once drivers’ drug and alcohol violations are made public, according to Freightwaves.
With carrier rates dipping year-over-year for the last six consecutive months, it has been a struggle for smaller, independent owner-operators to keep afloat. This will most likely continue into at least the first quarter of 2019, which could be yet another factor affecting the driver shortage.
We are not likely to experience the heightened freight volumes in Q1 this coming year that we saw in the first part of 2019. The anticipation of tariffs and the impending trade war caused the front-loading of products into the United States, which contributed to an inflated market.
will continue to offer us refinements in efficiency and productivity, but many of the predicted advancements are still years away from becoming mainstream.3 For example, driverless trucks, autonomous trucks, and 5G wearable technology have a long way to go before we see them have any notable impact on the industry.
The single most noteworthy advancement that will have an impact on the market in 2020 is shipper visibility. Freight providers that don’t offer real-time tracking and instant communication will be left behind. There is nothing more vital to shippers than knowing where their shipment is at all times. Full transparency means knowing when the freight was picked up, when it was delivered, and everything in between.
Federal Regulations and Fuel Prices
Proposed rulings, such as changes to hours of service (HOS), drug and alcohol testing, AOBRDs, and carrier insurance, can create disruptions to the supply chain. One such disruptor is pending legislation that may raise the minimum amount of insurance coverage for truckers and trucking companies, which can put a severe strain on smaller carriers.
Fuel prices could be another factor affecting the market. They are expected to soar in 2020 if the IMO (International Maritime Organization) regulations are put into place. The change has been called “the most significant environmental regulation ever implemented in the oil industry,” according to an article in Freightwaves.
Trucking Bankruptcies may increase in number as less stable carriers find themselves in hot water with a decrease in volumes in Q1. In 2019, the news sent shock-waves through the industry when two seemly healthy carriers announced they were abruptly closing their doors, one in February and one in December.
New England Motor Freight (NEMF) was the first of the giants to file for bankruptcy on February 12, 2019, putting 1,472 truck drivers out of work. It was one of the largest LTL carriers in the North East.
The shutdown of Celadon this month was also front-page news. It was the biggest bankruptcy in truckload history and the largest provider of international truckload services in North America, according to the Indianapolis Star. The sudden closure put almost 4,000 employees immediately out of work, 3,000 of which were drivers. Some analysts think there will be additional trucking companies filing Chapter 11 in the coming months since freight volumes typically decline further the first quarter of every year. These closures, combined with the Drug and Alcohol Clearinghouse, could create significant problems.
There are ways that shippers can prepare for these challenges in 2020. If capacity gets tight and trucks are hard to come by, make sure you have established favorable relationships with your transportation providers. Keep communication open, providing them with frequent and complete information regarding your regular lanes and predicted volumes. This will help them secure dedicated carriers when things go wonky.
Plan for higher freight rates knowing that a truck shortage is a good possibility. Add it to your freight budget so there are no big surprises for all parties involved. And plan ahead, allowing your freight provider plenty of time to get you the best rates possible.
It will be interesting to see what effects capacity, weather, political, and economic influences have on the market next year. It is clear that we can expect new hurdles and growing challenges, but that’s why we love this industry! There is never a dull moment.
Charts and Graphs
Figure 1 – DHL Power Pricing Index from Freighwaves
Figure 2 – Market Demand Index (Truckstop)
Figure 3 – National Spot Rates (DAT Trendlines)
Figure 4 – Project 44 Webinar/KeyBank Capital Markets, Inc.