Looming capacity shortage, regulatory demands and driver shortage triggers.
After high spot rates during the first few months of the year, prices for van, refrigerated and flatbed transport came down to earth during the summer, but a looming capacity shortage fueled by pending regulatory changes, a driver shortage, and increased demand could push the spot market for rates into the stratosphere.
As measured by DAT Solutions, van spot rates ended the first week of August at an average of $2 per mile, down six cents, after hitting a record high of $2.08 toward the end of June that had first been seen in March. Flatbed rates increased by one cent in the same August time period, inching up to $2.45 per mile on average and continuing a steady rise since May. During the same time, average reefer spot rates fell by nine cents, continuing a trend since June.
This picture of a week on the spot market toward the end of the summer shows that at any given time pricing goes up and down. The trend for the rest of the year, though, is toward spot market rates rising significantly. Analysts warn shippers looking toward the fall should talk with carriers about contract rates or face a much more difficult spot market, where capacity will be harder to come by.
Frank Cirimele, director of products and services at Cass Information Systems, said the spot market should have been pricier, judging by what he heard from carriers and other analysts at the beginning of the year. Cirimele helps put together Cass’ Truckload Linehaul Index, which measures rates paid by shippers. In June, the index showed shippers spent an average of 5.2 percent more on transportation than in the same month last year, continuing a trend of increasing transportation spend. In March, shippers spent 6 percent more on truckload shipping year-over-year, followed by increases of 5.7 percent in April and 5.8 percent in May.
Even with these measured rises, carriers, he said, expected to get much larger price increases from shippers during the first half of the year. Truckload and less-than-truckload capacity also didn’t tighten up as quickly as he thought it would. Capacity firmed up during the severe winter weather, Cirimele said, but this was a blip in the market and didn’t have a lasting effect. This fall, however, will be a different story.
“It’s going to get pretty interesting pretty quick, depending on what kind of seasonal push comes up this year,” he said. “As capacity tightens, there will be less of a spot market, and contracts will be pushed to the limit as carriers are struggling to find capacity to honor their contracts.”
Cirimele warned spot market capacity will tighten quickly because carriers will need to use their equipment to fulfill contracts, leading to less availability for shippers accustomed to playing the spot market. Spot prices will rise across the country, he said, adding that intermodal pricing in the Southeast and Northeast would seem to be more vulnerable to capacity shortages.
Shippers that have been using a core group of carriers for a long time, and have long-term contracts in place with those providers, should be fine when capacity tightens up. They may have carriers come to them to renegotiate those contracts mid-stream — analysts have reported this renegotiation of contract rates has already been occurring — but these shippers will be able to find trucks for their goods. Relying on the spot market, Cirimele noted, will be a riskier proposition. He said shippers that haven’t maintained relationships with carriers may have a long fall.
“Unless you can give carriers a long-term commitment, you’re at the mercy of the spot prices,” he said. “If you’re a shipper who has not been supporting a core group of carriers and using mostly spot, now is the time to see if you can negotiate some contracts, provide some long-term commitments of volume.”
Capacity will tighten on the spot and contract market due to seasonal transportation shifts, but Cirimele also said the use of electric on-board recorders, as mandated by the U.S. Federal Motor Carrier Safety Administration, will also constrain capacity because the devices will effectively slow productivity for carriers. He said carriers will lose flexibility regarding their driver numbers when they move from a manual system to an electronic system that won’t be forgiving.
“You lose all flexibility, and even common sense, would be the carrier argument,” he said. “Instead of a driver driving an hour more — you can’t do that because it’s so highly regulated, but by doing that he could actually get home and be rested, etc. There’s arguments on both sides, but in general the feeling is … [the devices] are going to bring more stringent control and take away any gray interpretive area that you may have.”
The driver shortage, which has been talked about for years, will also impact capacity in the near-term, he said. Ciramele has seen carriers starting to proactively address this issue and create better driver retention by shortening routes to get drivers home at night, improve training programs, and increase pay. Carriers have also begun to retire old equipment before it’s absolutely necessary to get drivers in newer, more comfortable vehicles, which leads to higher driver satisfaction. Carriers are no longer “trying to squeeze every cent out of a unit,” he said.
Mark Montague, an analyst at DAT Solutions, said the run up to price increases expected during the fall actually began last year. The hours of service rules, and the subsequent increase in electronic logging devices, has already led to a number of bankruptcies for smaller trucking companies. With these companies exiting the market during the third and fourth quarters, capacity had already taken a hit before the winter weather snarled the country and threw a wrench into supply chains.
“On the spot market, rates ran up to levels we have never seen since we’ve been tracking rates, and that goes back about six years,” Montague said, adding that he’d never seen anything like the affect the winter weather had on the market during his 34 years in the industry.
When spot rates peaked in March, that caused another shift in the trucking industry, as contract rates started to increase, he said. Operating costs for carriers rose, and they began to contact their contracted shippers asking for a renegotiation in rates.
“They’re basically coming to the shipper saying, ‘Hey, if you want me to continue to haul for you with the quantity of capacity I’ve furnished in the past, I need a deal,’” Montague said. “And frankly, a lot of these contract carriers were not able to honor their contracts in the first quarter of this year because of the terrible weather and the shippers went out to the spot market.”
As far as capacity in the current market, demand was soft at the end of July, which corresponds with the normal flow of freight, especially with such strong spot rates during June. Looking to September and October, Montague said the good economic numbers reported in the press might cause problems with the market, leading to a demand that truckers can’t keep up with. When this occurs, shippers have gone to the railroads, but with record agriculture seasons and increased crude oil shipments, railroads have been having capacity issues of their own.
“Average train speeds are down, terminal delays are increased,” he said. “The railroads are the solution, but they’re also becoming bogged down.”
Shippers looking to successfully navigate the impending pricing changes need to diversify their shipping partners — looking to rail when needed, but also widening their stable of truckers — and equip themselves with information about seasonal capacity constraints on key shipping lanes. But the government can also help the situation, according to Montague.
“One of the things that’s really needed is infrastructure spending to ease the bottleneck,” Montague said. He used the example of truckers starting their shift at 5 a.m. in Philadelphia, spending two hours sitting in traffic before they can really start moving. He added that truckers also need better parking facilities so they’re not spending 20 minutes finding a space to take a 30-minute break.
“I’m really a big advocate of Congress getting their act together and coming up with a spending plan that addresses all those issues,” Montague said. “Whatever the plan is, it needs to address the long-term needs of the country.”
This article was published in the September 2014 issue of American Shipper.