This summer has not been a very happy time for US shippers. They’ve had to contend with persistently high trucking prices. The reasons for these price increases are very complicated. For example, the emerging trade war between China and the US has not helped matters. While the shipping industry did not have a very good year in 2017, 2018 was widely perceived as an opportunity to regroup and make something happen. Sadly, trucking prices appear to be piling on the pressure when the shippers are already struggling to find their bearings.
Shippers need to keep a close eye on the spot market
It is an inescapable fact that spot rates for dry van truckloads continue to plague the market with their record-breaking highs. The all-time record was achieved on June 23, 2018, according to the DAT Solutions load boards. Clearly, this is a situation that will raise concern within an industry that is already under considerable pressure to make ends meet.
The higher pricing also has other consequences. For example, more truckers opted to join the spot market in the very week that the record highs had been recorded. Despite their entrance, prices continued to rise. This continued climb in price is an indicator that this is not an anomaly that is going to fade away any time soon. Instead, this could turn out to be an extended period of higher trucking prices.
The statistics speak for themselves. First, the DAT national average dry van spot rate had risen by one cent (including fuel surcharges). That meant buyers are paying up to $2.31 per mile. The rates were even higher on some 64 of the 100 van lanes being operated by DAT. This situation is very similar to the very high rates that were experienced in January 2018. At that time, the electronic logging device mandate had been passed…yet another unexpected change within this dynamic industry.
Spot market for dry vans is on the rise
One of the other dynamics that must be incorporated into the equation is the demand for produce. So far, this demand has been pushing up refrigerated rates. The result is squeezed capacity to accommodate the newly increased merchandise. Some signs of this trend include overcrowding at terminals as well as an acute shortage of drayage capacity. The rail intermodal has been ground zero of these trends.
In any case, there continues to be tight capacity across all the surface transportation modes, which means that everyone who uses warehousing services will feel the impact. This is an economic cycle that appears to deviate from any previous trends. There is a demand imbalance within the industry which continues to grow. Some have suggested that it is a cyclic movement covering the last three years and this year we are back to the initial phase.
Rates will continue to climb
Those hoping for quick relief will have to wait a bit longer. Even if there is some respite this summer, it is not likely to last the remainder of the year. Charles Clowdis of the Trans-Logistics Group predicts that the rates will continue to rise. Trans-Logistics Group reported contract truckload rates had risen by up to 11% on an annual basis. This rise was calculated without reference to the compulsory fuel charges that are already driving up costs in the industry.
It is not yet clear how long the rates will continue to rise. Lee Klaskow of Bloomberg Intelligence argued that it is not so much about how long the rates increase but their impact. Accordingly, the truckload carriers are the winners if this prolonged truckload cycle goes as far ahead as 2020. On the other hand, it is anticipated that eventually the truckload rates will stabilize.
Spurts and declines throughout the year will complicate the comparative analysis of these rates. However, the annualized rate increases are expected to fall into the middle single digits by 2019. They will then drop to the low single-digit rate by 2020. This is premised on the idea that the US economy will continue to grow with a tight job market. The one constant will be the lack of truck availability, which is partly driven by the lack of truck drivers. Any significant shocks to the economy might change the entire dynamic, so that must be added to any calculations.
LA is the top spot market
In the final week of June 2018, Los Angeles emerged as the hotspot for rates increases. The rate from LA to Chicago averaged about $2.03 per mile, which represented a rise of 25%. The dry spot rate from LA to Atlanta averaged at $3.72 per mile, an increase of 21 cents and even higher than the reverse on the southbound lane.
The dry van truckload volumes on the load board in LA fell by 5%. Nevertheless, the truck posts increased by 7%. The load-to-truck average fell to about 9.2 loads per truck. This figure is still very high when compared to the average in June 2017 which was 5.6 loads per truck. DAT explains this trend by arguing that it all stems from there being fewer suitable alternatives for shippers.
Naturally, truckers are attracted by higher prices for their services. One would expect that this would lead to a reduction in the price. These are supposed to be the standard laws of demand and supply. However, the recent upshot in truckers did not seriously dent the rising prices. Despite this influx of rent-seeking truckers, the DAT national average dry van spot rate (including fuel surcharges) rose that week and currently stands at $2.31 per mile. 64% of DAT van lanes have experienced an increase in rates. Indeed, the spot rates are right back to the highs that were experienced at the beginning of 2018.
Shippers should prepare for higher rates
What does this all mean for shippers? The short answer is that there will be higher rates and costs. The long answer is directly linked to the upheavals within the sector. It has not been an easy year, and these spot rates do not show any sign of abating. Shippers and carriers must continue to carefully monitor the market because these higher rates will eventually affect their bottom line. The interrelated nature of the shipping industry is coming to the fore during this episode.