The current data coming out of the flatbed segment of trucking is signaling that the industrial economy in the U.S. is anything but flat. While it is impossible to exactly predict how the Trump steel and aluminum tariffs will influence the industrial economy in the coming months and years, the increased price of oil (WTI over $66 as we write this) has led to a widespread surge in fracking activity not seen since 2014. In turn, that increased fracking activity is driving a strong resurgence in industrial activity throughout the U.S. economy.
DAT Solutions is reporting that the flatbed load to truck ratio reached an all-time high last week of 111. That’s 111 loads for every truck! Our own, Broughton Capital engineered DAT Flatbed Barometer is displaying an equally bullish signal.
So, it shouldn’t come as a big surprise that spot rates in the flatbed segment:
- hit an all-time high of $2.63 a mile last week;
- have exceeded contract rates since September 2017;
- in March YOY, were up 23.2% on a spot basis and up 9.5% on a contract basis.
After reviewing the most recent data, we called a gentleman that we’ve been privileged to call a friend for over 25 years. A gentleman who has spent his entire career in the flatbed industry and currently runs thousands of them. We had two basic questions for him:
- “Is this real? Are these stats, which seem unbelievable, a reflection of what is really happening out there in the real world?”
- “Have you ever seen anything like this?”
In short, he told us that the stats are real. That the flatbed market was seeing the highest level of demand and the tightest capacity it had ever experienced, and that “No! He had never seen anything like this before.”
Capacity Exceeds Demand
The next logical question is, “Why?” Is there a capacity shortage because of ELDs or some other factor? Is demand just so incredibly strong? Is it a combination of both sides of the equation? Or are there other factors at play? “We have put in place the largest increase in driver pay in our history, and we still can’t find enough drivers to seat all the trucks we need to meet the demand we are currently seeing,” is the refrain we have heard from dozens of trucking management teams. Which at first would suggest that it is more of a capacity problem, however we think it is more of a demand issue. Here is our simple breakdown:
Capacity – We are working on developing a data-based, definitive answer using the historical consumption of diesel gallons to measure the ELD impact on capacity (more on that in coming reports). We know that the rule for ELDs went into effect on Dec. 18 last year, but we do not believe that reduced capacity by a material amount. In part because not every trucker was immediately compliant, and in part because there wasn’t full enforcement. Capacity was already tight and getting tighter before the ELD rule went into effect. It is too early to tell whether the April 1 ELD mandate of ‘full enforcement’ will have a material effect; it certainly could, but the load to truck ratio was already over 100 to 1 before April 1.
After we enter all these facts into evidence, we have to admit that ELDs have the potential to create more much more havoc in flatbed than dry-van. There really isn’t any material amount of drop and hook in the flatbed industry. Nor do we anticipate that there ever will be. For what we think are obvious safety reasons, the driver is very involved in the loading and unloading process. Especially in the loading process, the driver’s safety and the safety of the motoring public are dependent upon the driver closely monitoring (or doing) the load securement. This involves time. Time that carves away at the available hours of service for the driver. Bottom line, the longer it takes for the driver to monitor the loading of and proper securement of the load, the less time the driver has remaining for driving.
Are there other factors such as driver demographics and competing job opportunities that are slowly draining capacity away from trucking in general and flatbed specifically? Certainly, that is the case, but those are slowly diminishing capacity and aren’t by themselves capable of creating the level of capacity crunch we are currently experiencing.
Demand – We believe that this is where more than 80%, probably more than 90% of the answer to the question lies. Fracking produces oil in most of the major fields in the U.S. at costs below $60 a barrel. As a result, we have seen a sharp increase in first drilling and then fracking activity, in first the Permian and then the Eagle Ford and now even the Bakken. This activity directly drives steel, refinery, and manufacturing activity for the goods that support the oil and gas exploration industry, but more importantly drive wave after wave of incremental demand. As long as oil stays above $60 a barrel, we see no short-term reason for industrial activity, and the demand it creates, to do anything but continue to grow.
Imbalance of Lanes – We also believe that the imbalance of lanes is a contributing factor to what is happening in flatbed. As everyone in the trucking industry understands, there just aren’t as many backhaul opportunities for flatbed as there are for dry van and reefer. As a result, big surges in demand create even bigger dislocations in equipment. And again, as everyone understands, equipment capacity is more than having the equipment available in the marketplace; it’s having the equipment available in the marketplace where you need it. Unfortunately, much of the current surge in flatbed demand is increasing the level of equipment dislocation, creating an even tighter capacity market than it might be otherwise.
Fasten your seatbelts.
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