EconomicsMarket InsightNews

Baby it’s cold outside, but it’s hot for trucking

( Photo: Shutterstock )

The worst kept secret in the industry is that demand is in excess of capacity in every mode of truckload trucking, and has been for several months.  We experienced the first ‘fall surge’ in demand in a decade, which only served to make the situation even more severe.  Shippers are crying and truckers are taking it to the bank.  We can’t tell you how many times in the last couple of months we’ve heard, “If you can’t make money in trucking now, then you never will!” 

What changed?  Where did all the volume come from?

  • The re-acceleration of the industrial economy, which started in October 2016, as WTI Crude broke above $45 a barrel, and shifted into high gear in November 2017, as WTI Crude broke above $55 a barrel (at $61 a barrel as we write this);
  • Followed by the inflation of everyone’s 401K and millennials finally starting to form households in earnest, which led to a holiday shopping season that set records on several metrics.

We feel it is important to remind everyone that this is before the Dec. 18 enactment of the ELD rule and the late December passage of the Trump Tax Cut.  Both of which should serve to cut capacity and further boost volume. 

So as you head into the heaviest part of the contract rate bidding/renegotiation season, what should shippers, brokers, and truckers be focused on?  For starters, we should remind readers of a fundamental rule of all marketplaces: Volume Leads. We have repeatedly observed in a host of different markets that volume goes up before pricing starts to improve and volume goes down before pricing starts to weaken. Even in markets as basic as the weather, the number of hours of sunshine (sunrise to sunset) starts to decline long before the temperature starts to fall, and the number of hours of sunshine starts to increase long before the temperature starts to rise. 

Volume is strong and poised to continue getting stronger.  Seasonality will bear out in February, but by March, we expect demand to continue to outstrip capacity, and expect the fall of 2018 capacity crunch to be even worse than the capacity crunch of 2017. 

  • Shippers should be focused on securing capacity.  Distribution managers don’t get fired for being the negative variance in the budget.  They get fired for not getting the load picked up and delivered.  The biggest risk is not being able to get capacity in the fall of 2018.
  • Brokers should be focused on securing capacity and securing margin.  Capacity is going to be scarce in 2018.  Rates are going to be volatile.  Don’t guarantee customers capacity or rate that you don’t already have locked.
  • Truckers should focus on raising price.  The risk is being timid or bashful or even embarrassed by the amount by which rates need to go up.  When every shipper is talking about how much they value “relationships” with their service providers, we know that there will not be a better time to take up price.  We also know that drivers are going to become even more impossible to find.  Why?  As oil stays above $60, fracking is stealing drivers away in all the major fields in the U.S. (Permian, Eagle Ford, Bakken).  ELDs make it more difficult for a driver to get the miles legally.  The biggest risk is not asking for enough price and missing out on the year in which profits should have been maximized.

We understand, this period in history will pass, if you survive it.  At some point in the future, demand will wane, and capacity will grow enough to meet and then exceed demand.  Trucking is considered a cyclical industry, because it is.  However, we see that as being several quarters, perhaps even several years, away.  For now, the only thing that is cold is the weather, because everything else is trucking is hot and poised to stay that way.  Everyone in the industry, no matter what your role, should be planning for a long hot summer.

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Donald Broughton, Principal & Managing Partner, Broughton Capital

Prior to starting Broughton Capital Mr. Broughton spent nine years as the Chief Market Strategist and Senior Transportation Analyst for Avondale Partners. Before that, Mr. Broughton spent over twelve years at A.G. Edwards. At A.G. Edwards, in addition to being the Senior Transportation Analyst, he was the Group Leader of the Industrial Analysts and served on the firm’s Investment Strategy Committee. Prior to going to Wall Street, Mr. Broughton spent eight years in various distribution and operations management roles in the beverage industry, including serving as the Corporate Manager of Distribution for Dr. Pepper/Seven-Up companies and Chief Operating Officer for Bevmark Concepts.