Contract Rates Outlook Remains Strong with Few Factors to Mitigate Market Tightness
According to different sources, US contract rates are currently in the high single digits and low double digits. Why? Since mid-2017, truck capacity and rates were affected by a number of different factors that included the new ELD mandate, a driver shortage, increased cost of operations and labor, holiday backlogs, chassis shortages, and adverse weather conditions. Consequently, the market appears to be locking in higher contract prices and moving away from the spot market. For definition purposes, a contract rate refers to a fixed price that is determined in advance of any freight moves for a set period of time while a spot rate refers to a single-use shipping rate issued to a shipper and valid for a short period of time. In fact, some large enterprises and carriers are specifically locking in contract rate increases of over ten percent year after year. While the spot market rate was higher than the contract rate prior to March 2017, the contract rates increased after this date.
Moreover, according to information received from DAT Solutions, the average linehaul van rate was 19 cents higher than one year ago, equivalent to an 11.3 percent increase. Also, FTR Associates forecasted a 13 to 14 percent higher contract rate – an increase from their previous forecast of 12 percent. Meanwhile, contract prices rose only 3.9 percent in 2017.
Time for Shipping Company Investments?
The current favorable trucking market conditions present a long-awaited opportunity for trucking and logistics companies to earn profit margins that can allow for investment. Some companies are doing just that – they plan to reinvest in new equipment and attempt to hire new drivers, and in turn, implement across the board rate increases. In fact, one of the largest trucking companies in North America, Knight-Swift plans to spend $575 million in 2018 to replace their aging truck infrastructure. However, approximately thirty percent of contract increases will benefit drivers. While driver’s compensation has increased throughout the shipping industry, at Knight-Swift specifically, the increase is approximately seven to nine percent.
Another positive note on the increasing contract rates is that Wall Street is currently bullish on the trucking/logistics industry. For example, Morgan Stanley raised its target prediction price on the company shares of Schneider from $28 to $35. Meanwhile, a number of other hedge funds recently acquired more shares in Schneider.
Other Issues in the Shipping Industry
While there is a higher demand for raw materials and goods, Hartford economist Donald Ratajczak recently warned at a logistics conference that unless there is an unexpected capacity expansion, it will cost companies more money to move products to their destinations. The Cass Freight Index numbers concur with this prediction. In fact, in December of 2017, the spending on freight rose faster than on freight shipment volumes to about 7.2 percent over the previous year. Moreover, prices – not including fuel surcharges – rose 6.2 percent in December of 2017 over the previous year. Additionally, December was the ninth straight month of cost increases on a consistent basis. Furthermore, according to January 6, 2018 data from the JOC.com Market Data Hub, the DAT national dry van spot rate averaged $1.99 per mile – an increase of 30 percent over the previous year’s numbers.
Nevertheless, according to Hartford economist Donald Ratajczak, while 2018 promises to be one of the best years for less-than-truckload (LTL) and truckload prices since the years 2005 and 2010, he also warns that if volume growth accelerates, there could be possible intermodal service problems and capacity issues. According to our interviews with shippers, this type of situation is occurring and the amount of “rollover freight” – or freight that is not picked up on the date it is supposed to ship out – as well as service failures, has increased sharply. While a shipper may secure a truck the next day, this delay does complicate shipping schedules and costs companies lost revenue. In some cases, retailers pay shipping companies an additional amount of money so that product can be moved on time and on schedule.
US Manufacturers Report Lower Profit Margins
While increased contract prices are great news for shipping companies, the contract rate increases resulted in lower profit margins for many US manufacturers, retailers, and food companies during the first quarter of 2018. Some of the well-known companies that experienced such lowered profit margins include Hershey’s, Coca-Cola, Procter & Gamble, and Unilever.
Besides the cost of freight, changes in the regulations concerning how long truck drivers are allowed to drive their vehicles also contributed to the lower profit margins. As of April 2018, truckers are required to use electronic logging devices to ensure they do not drive more than eleven hours per day. Drivers must then rest for ten hours before driving again. With the required use of electronic logging devices, drivers cannot “fudge” driving times on paper logs, and in turn, drivers are more likely to stop driving once they reach the eleven hour limit. These electronic devices log the number of hours a driver spends driving and the device must be turned over to the proper authorities at traffic stops and routine truck inspections. While implemented for safety reasons, a survey discovered that approximately seventy percent of the truckers that use the devices stated that they now make less money and drive shorter distances.
Overall, it appears that the trucking industry is currently flourishing in 2018 and the constant increase in contract pricing appears to reflect this situation. On the flip side, many shippers are suffering from lower profit margins as a result of the increase in contract rates. Stay tuned to see how the second half of the year plays out.