Freight Forward - Following the Trends

Welcome to Freight Forward, where each Monday, I’ll recap what happened in supply chains the previous week and what to expect for the week ahead. Just in case you’re wondering, I’m Cathy Roberson, supply chain writer, and researcher. For this weekly series, I serve as a research analyst for the Journal of Commerce (JOC), for whom I identify trends, provide thoughts and input into stories and assist with parcel last-mile queries.

I’d like to start this week’s Freight Forward with a LinkedIn post from Robert Garrison, CEO of Mercado:

Since May of 2020, we have been dealing with way more demand than supply. There are growing signs that we are about to be facing the opposite. For supply chain professionals this means that instead of a bull market where we are chasing greater supply (products, containers, space) to meet growing demand; we may be entering a bear market where we will be focused more on lowering costs as a company revenue slows. Simply, it's not sustainable to have lower demand with increasing costs. Making this transition will not be easy as the suppliers of products, services, containers, vessel space, warehouse space, etc. have also invested to keep up with increased demand; and for the first time in a long time, are making strong profits. Worse, due to the lengthy nature of international supply chains (five months on average), we may have to do both things simultaneously.

After two years of heightened demand due to COVID-19, a shift in behavior or perhaps a sense of ‘normalcy’ may be underway. Robert is right in that the shift from addressing demand at any cost to one focusing on costs will be difficult. Even worse, as Robert noted, will be having to manage both demand and cost. But, I expect those that are able to manage both demand and cost successfully will be the winners in terms of profitability.

A slowing was also noted by Heather Dohrn in a recent JOC webcast. “Our freight levels are still trending over 2021, though we may have seen a slight slowdown. We saw a lot of customers ramp up their inventory levels at the beginning of the year, and we’ve seen some freight levels dip because of that.”?Heather Dohrn, the chief commercial officer of midwestern regional LTL carrier Dohrn Transfer, said during the April 14 ?JOC.com webcast, Trucking Market Report: First-Quarter Review and Outlook (Free to view replay).

Donald Broughton, a transportation analyst and principal of Broughton Capital, describes the slowdown as “delayed seasonality." Broughton said inventory restocking is catching up, leading to a more manageable, sustainable, freight flow rate. “January and February load levels were unseasonably strong,” he said in his latest monthly report.

Despite how one describes this slowing, a hint of caution comes from Joseph C. Von Nessen, a research economist at the University of South Carolina’s Moore School of Business who said, “If inflation remains elevated, we expect purchasing activity to abate and for freight import volume to begin to recede from its current highs during the second half of the year.”

Inflation Pressures

The Consumer Price Index (CPI) and Producer Price Index (PPI) have trended up over the past several months, raising red flags for all, from manufacturer to consumer.

The latest CPI data for March increased 1.2%, seasonally adjusted. For the 12-month period ending in March, CPI increased 8.5%, before seasonal adjustment, the largest increase since December 1981. Fuel and food are the leading contributors to the increase. Excluding energy and food, the overall index rose 6.5%, the largest 12-month change since the period ending August 1982. The energy index rose 32.0% over the last year, and the food index increased 8.8%, the largest 12-month increase since the period ending May 1981.

The latest PPI data for final demand increased 1.4% in March, seasonally adjusted. On an unadjusted basis, final demand prices have increased 11.2% for the 12 months ended in March, the largest increase since 12-month data were first calculated in November 2010.

In March, the increase was led by a 2.3% increase in advance in prices for final demand goods. Prices for final demand less foods, energy, and trade services moved up 0.9% in March, the largest advance since rising 1.0% in January 2021. For the 12 months ended in March, the index for final demand less foods, energy, and trade services increased by 7.0%.

The PPI in terms of parcel, LTL, and TL is quite the eye-opener. Check out this chart shared by Transportation Insight (Thank you!) – Sharp increase for TL followed by LTL and parcel – all three are higher than the overall PPI index (note: PPI data for transportation modes is available in the PPI monthly announcements in one of the supplemental charts).

The Costs

As transportation costs in the US rise, shippers are consolidating more loads and limiting the number of partial shipments, which in effect is creating truckload spot market capacity, according to Dean Croke, a principal analyst at DAT Freight & Analytics. “The fact that we’re coming off such market disruption late last year has distorted things,” such as the amount of available capacity, Croke said.

For parcel shippers, fuel surcharges are adding to parcel rates that are one of the highest on record according to Transportation Insight’s Todd Benge, Senior Vice President of Parcel Operations. Parcel capacity is beginning to normalize Benge further noted.

In a nod to its rising costs, Amazon announced, for the first time, it would add a 5.0% fuel and inflation surcharge on top of the current Fulfillment by Amazon (FBA) fulfillment fee per-unit rates effective April 28 (Thanks to Jon Elder for the share!).?

Which way is demand going?

While costs rise, demand for goods is more difficult to gauge. Peter Tirschwell writes in a really good JOC story, that a range of sources note that although the current scenario may appear contradictory, “key themes are taking shape including the continuing strength, for the moment, of the US consumer and the resulting record import volumes; spending has seen only a gradual return to a normal balance between goods to services amid the ongoing uncertainty of the pandemic.”

Furthermore, Peter notes in the story that the combination of US import volumes that have grown approximately 20%from pre-pandemic 2019 and repeated ongoing shocks to the supply chain will continue to disrupt cargo flow throughout much of 2022.

“We fully anticipate vessels to backlog on the East Coast this summer and I don’t think Savannah is going to escape that,” Griff Lynch, CEO of the Georgia Ports Authority, told JOC.com.

Furthermore, in the same story, Ari Ari writes that the SC Ports Authority halted its forecast on when it will eliminate congestion and restore normal operations in Charleston. “These issues are not quickly solvable as they require more distribution center space to handle goods, a larger truck driver workforce, more available chassis to move cargo, and more capacity with ports and port-related infrastructure,” Jim Newsome, CEO of SC Ports, told JOC.com Apr. 7. “[We are] providing Sunday hours for motor carriers, providing early morning gates for [railroad-destined] imports, and providing selective term leasing of our new chassis.”

Rail is becoming an issue from port to inland. As noted by Mr. Newsome, the SC Ports Authority is providing early morning gates for the rail to keep containers moving from port to inland.

Norfolk Southern Railway is making changes to its free time and storage policies to encourage domestic and international shippers to pick up containers faster, especially on weekends. Effective April 25, Norfolk Southern will designate Sunday as a business day in order to charge rail storage fees on domestic and international intermodal loads, and on June 1, Detroit, Cleveland, Columbus, and Jacksonville into Tier 1 terminals for international containers, which will cut the free time for containers from 48 hours to 24 hours.

The US West Coast ports are also seeing a buildup of rail containers. Bill Mongelluzzo writes in one of his JOC stories that US Secretary of Transportation Pete Buttigieg is pressing western Class I railroads to address the backlog of rail containers that are congesting the Los Angeles-Long Beach gateway even as the vessel backlog is shrinking. Gene Seroka, the executive director of the Port of Los Angeles, told a virtual press conference there were 16,000 rail containers waiting to be loaded onto trains at the Port of Los Angeles, “twice the number that was on the terminals last fall when BNSF and Union Pacific railroads drastically reduced intermodal rail service to the West Coast in order to clear logjams at their ramps in the Midwest.”

According to Bloomberg, Union Pacific plans to limit customer-owned railcars on its network. The railroad said in a letter to customers that it would begin metering traffic after April 18 if customers do not voluntarily reduce their inventory before then. Union Pacific also said it’s removing 2% to 3% of its own railcars and has added 50 locomotives since January with plans to bring on 100 more to help move cars along.

Ocean to Air

As noted in last week’s Freight Forward, a shift from US West Coast ports to East Coast ports is occurring and resulting in port congestion.?In response, shippers are moving some freight to air, resulting in the Trans-Atlantic westbound air freight volume increasing 25% in March year over year. Niall van de Wouw, chief air freight officer at Xeneta, noted in a market update that the logistical difficulties on the water between Europe and North America were putting “wind into the sails of the air cargo market.” “With continuously declining schedule reliability of the ocean liners, logistical departments will likely be required to resort to air freight because of disruptions to their supply chains caused by these record-low service levels,” he said.

But, consistently keeping those “wind in the sails of the air cargo market” has been difficult. According to the latest Clive (owned by Xeneta) data, Weekly data for March, and up to 3 April 2022, shows volumes compared to the pre-Covid level in 2019 fell 6.5% last month and were 4.5% lower than March 2021. general air cargo capacity stood at -14% versus March 2019 and at -4% compared to the same month a year ago. This was exacerbated by the closure of Russian airspace and the immediate cancellation of some airline capacity, which led to a quick 20% fall in Europe-NE Asia capacity. “…We have been reminded of how the limited control the general airfreight market has over its own destiny and how it is impacted by passenger traffic trends, disruption in the ocean freight market, and geopolitical events,” Niall van de Wouw said.

Airfreight capacity could further be impacted with the EU’s exemption of allowing airlines to put cargo in the cabin of passenger aircraft ceasing on July 31. The US FAA ended its exemption on Dec 31, 2021.

A fascinating chart share from IATA shows the international cargo volume share from 2019 through February 2022 passenger airline’s cabins, bellies of passenger airlines and dedicated freighters. It shows the improvements, but it also shows how sensitive to market conditions the air freight market is.

Passenger airlines that carry cargo in the cabin (aka preighters) carried 13% of total international cargo in February. The percentage is slowly declining from a high of 25% in April 2020. Passenger airlines carrying cargo in the belly of airplanes carried 28% of total international cargo in February.

Before the pandemic, passenger airlines carried about 53% of international cargo. As of February 2022, passenger airlines carried 28% of international cargo, a decline from the past few months. The decline is likely due to passenger airlines' removal of capacity due to COVID restrictions and shortage of pilots and other workers.

Meanwhile, dedicated freighters represented 59% of total international cargo volumes in February, up from 47% but a decline from its high of 71% in 2020.

What to look for this week

What’s ahead this week are a few key industry data points to watch as well as Q1 earnings announcements.

• NAHB home builders' index comes out today (April 18). The index is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes. The overall index has declined each month this year but regionally, folks in the West and mid-West seem the most positive.
• Building permits, housing starts, and completions for March will be published by the US Census on Tuesday. Building permits declined 1.9% from January to February but housing starts increased 6.8% from January to February and completions were up 5.9% from January to February.

I’m also hoping we’ll get some good insights from a number of trucking firms including JB Hunt, Knight, Landstar, Heartland, and P.A.M. who will be reporting Q1 earnings this week. Class I railroad, CSX will be the first of the rail companies to report. Real estate investment trust firm, ProLogis will also report Q1 earnings. ProLogis always does a great job discussing the warehousing market, so I’m particularly interested in hearing how US warehousing fared during Q1 and their views on the demand outlook for warehousing space.

I’ve also included the retailer Tractor Supply in the companies to watch. Tractor Supply is among the first retailers to report Q1 earnings. They’ve seen a lot of growth and have made a number of supply chain investments that have benefited them financially. I’m curious to hear what they have to say in terms of outlook.

That’s it for this week. Please be sure to hit the subscribe button to receive the latest updates.

What did I miss? Have a question? Let me know in the comments. I’ll be checking back throughout the week to answer questions, address comments and share additional insights.

In the meantime, here’s hoping everyone has a good freight week ahead!

-Cathy

P.S. If all goes according to plan, look for a short video from Peter Tirschwell discussing the upcoming ILWU contract negotiations in next week's Freight Forward.