Q1 Logistics Review
By Tom Sanderson, CEO, Transplace
The first quarter of 2015 has quickly come and gone. Given it was filled with some interesting ups and downs, I want to reflect back on what’s happened. Below you’ll find key highlights from the first three months of the year, which is based on certain economic data driving freight demand as well as legislative and regulatory issues affecting freight transportation. I’ll also share what I’ll be watching for in Q2. Now, on to this quarter’s recap.
A Promising Start to the New Year
January reports revealed the manufacturing index had declined, but although December’s Purchasing Managers’ Index was the lowest since June 2014, it was the 19th consecutive month of expansion. December auto sales were very strong – in fact, the combination of low gas prices and low interest rates helped make December auto sales the best since 2004 with full-year sales total for 2014 up 6% year-over-year. Housing starts were steady in 2014 with 1.006 million overall, and December single family starts reached the highest of year – marking a post-recession high. This is promising, but there’s still quite a bit of ground to cover to get back to our average of just over 1.5 million housing starts per year, all of which impacts transportation due to freight demand for building supplies, appliances, furniture and other related items.
The end of January saw weekly retail on-highway U.S. diesel prices fall to an almost five-year low to $2.866 per gallon with the Energy Information Administration (EIA) predicting a $2.85 per gallon average for this year. In addition, dry van truckload capacity proved to be much more readily available than most of 2014, but remained tighter than normal by historical January standards. Meanwhile, refrigerated capacity was tighter than normal, which means rates will likely continue to rise faster due to steady rising demand. It’s important to note that demand for refrigerated transportation is less correlated to economic fluctuations than dry van or flatbed freight, so the future robustness of economic growth will not necessarily determine market demand.
Mid-Quarter Positive and Negative Changes
Early February is impacted by the west coast port issues, which caused the east coast ocean spot rates to rise sharply. The pricing disparity spiked primarily due to diversions from west coast ports. We also saw an interesting white paper from the American Transportation Research Institute (ATRI) get released analyzing the age demographics of truck drivers. The bottom line: U.S. truck driver population is aging and there aren’t enough young drivers in the labor force to replace the drivers retiring. The driver shortage problem isn’t going away and isn’t going to be solved by one solution. I believe it’s going to take numerous actions to make an impact. I highly encourage to you read this thoughtful white paper.
According to Stephens Inc.’s Q4-2014 update on publically traded truckload (TL) carriers, rates per loaded mile increased, with the Q4 year-over-year gain the highest in 10 years as driver shortages, strong seasonal freight and west coast port issues pushed capacity-demand balance in favor of carriers. I agree with Stephens’ prediction of 2015 rates to be up 4-6%. And despite being below its prior year level, diesel prices rose steadily in February up to $2.900 per gallon and housing starts continue growth with the fifth straight month above a million unit pace.
FMCSA Taken to Task, Capacity Remained Steady Heading Into Spring
In early March, the FMCSA was reprimanded for ignoring the General Accounting Office (GAO) and for its lack of action and follow up on the Compliance, Safety, Accountability (CSA) system and Hours of Service (HOS). There needs to be more congressional scrutiny of the FMCSA, which continues to disregard science and hard facts while encouraging regulations that actually harm carriers and shippers and hurts highway safety.
Flatbed capacity was more readily available than normal last month according to Morgan Stanley’s flatbed freight index – similar to capacity-demand balance in Q1 2013. Along the same vein, refrigerated freight capacity tightness eased up. Since little capacity is entering the industry, refrigerated rates will most likely continue to increase. And so far, there’s been no dry van capacity crunch. As compared to March last year, van capacity is much more freely accessible.
Q2 Forecasts & Expectations
Normally, in Q2 we see capacity start to tighten up as freight volumes grow, but that may not be the case this year. The combination of slow economic growth, relief from HOS restrictions and some added capacity may keep capacity-demand balance at current levels. Meanwhile, carriers continue to enjoy lower fuel prices, which may keep TL carriers from being as aggressive as was expected this year in raising rates. On the legislative front, we expect an extension of the existing highway funding bill in May after a lot of doom-and-gloom rhetoric. A longer term highway funding bill could happen this year, but Washington can’t agree on where the extra money will come from. The prospects of that money coming from fuel tax increases is remote, even though federal fuel taxes have not been raised since 1993. We continue to encourage shippers to focus on intermodal, as fuel prices will inevitably rise and TL driver shortages will eventually drive prices significantly higher.
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What topic were you most interested in from Q1? Any surprises or areas of concern? What are you watching for in Q2?