DC Velocity - February 2016

Avondale has forecast a 1- to 3-percent increase, on average, in 2016 contract rates, well below what carriers were forecasting during most of 2015, when contract rates did the unusual and rose as spot rates fell. Avondale said that “current spot market weakness has lasted long enough to begin to be troubling.”

Ben Cubitt, senior vice president of consulting and engineering for Transplace, a large third-party logistics service provider (3PL) in Frisco, Texas, agreed that shippers are well positioned to negotiate favorable rates. However, Cubitt said the current climate will likely not last forever and warned that any shipper or 3PL trying to take advantage of its leverage with carriers does so at its own peril.

SUPPLY/DEMAND UNCERTAINTIES

Much has been made of the slowdown in the macro-economy, which has hurt end demand for trucking service. Most of the decline has been felt in the industrial sector, normally the province of less-than-truckload (LTL) carriers. But retail did not burn the barn over the holidays, and that could be affecting truckload carriers as well.

Another culprit in the drop in spot rates is the extraordinary decline in diesel prices, mirroring the sharp fall in oil prices. As DC VELOCITY went to press, the federal government reported that its average on-highway national diesel price stood at $2.07 a gallon, the lowest inflation-adjusted level since the end of 2002. The price declines have caused fuel surcharges, which are mostly pegged to the government data, to be adjusted downward, leading in part to the fall in spot rates.

A third factor could be the current relative abundance in capacity, defying the multiyear projections of shrinkage in rigs and drivers. Net new truck orders— new orders minus cancellations—of heavy-duty “class 8” tractors hit 28,150 units in December, the best monthly numbers for an otherwise subpar year since February, according to consultancy ACT Research. The big winners were

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is “go time”
dual-driver “sleeper” tractors,
which had their best production
and order years ever, ACT said.

Trailer deliveries also set a record in 2015, ACT said.

December rig orders are generally placed by big truckers looking to get their replacement requirements in order ahead of the new year, according to Kenny Vieth, ACT’s president. The deliveries will be spread evenly throughout the four quarters, Vieth added.

But the year-end buying binge
may be the last for a while,
according to ACT. “With excess
freight-hauling capacity and slow-
ing freight growth, freight rates
have softened to the point where
many truckers are now taking
a wait-and-see approach before
committing to more new equip-
ment,” Steve Tam, ACT’s vice
president, commercial vehicle
sector, said in a statement that
accompanied the final December
tractor net-order figures.

In an interesting twist, Peggy Dorf, a market analyst for DAT, said that truckers may have used their significant savings from the decline in fuel prices to invest in new rigs. The firm did not show data to support that claim, however.

As for drivers, the wild card may be how many—if any—oilfield workers who may have been laid off in the wake of the decline in domestic shale-oil and gas drilling activity choose to transition into the trucking sector, which is still looking at a significant shortage of qualified drivers in the next few years.