Freight Forward - Is there a slowdown ahead?

Welcome to Freight Forward, where each Monday, I’ll recap what happened in supply chains the previous week through?JOC.com?articles and additional sources and also what to expect for the week ahead.

Just in case you’re wondering, I’m Cathy Roberson, a 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.

Drewry has forecast global carriers will make profits of $300 billion this year, almost double the $190 billion they made in 2021. It appears carriers are on their way to reaching Drewy's forecast. The latest carriers to report are Intra-Asia carrier Wan Hai Lines which saw first-half net profit more than double to $2.4 billion from $1.1 billion in the same period last year and Evergreen Marine reported that net profit more than double to $7 billion (NT$212 billion) in the first six months compared with $3 billion in the first half last year. Other carriers that reported earnings this past week include HMM which noted an 87% increase in total revenue to $7.6 billion, of which container shipping contributed 94%, or $7.2 billion. Hapag-Lloyd reported a nearly three-fold increase in H1 interim net profit to a record $9.5 billion while Yang Ming reported that net profit doubled to $3.9 billion from $1.9 billion last year and total revenues increased 60% to $7.2 billion compared with $4.5 billion a year earlier.

However, carriers may not see as strong profits in the second half of the year compared to the first half of the year as US retailers expect imports will decline 1.5% year over year in the second half of 2022 and will decelerate further in 2023 as the US economy slows.

“Retail sales are still growing, but the economy is slowing down and that is reflected in cargo imports,” Jonathan Gold, vice president for supply chain and customs policy at the National Retail Federation (NRF), said in the August Global Port Tracker (GPT).

According to an Air Cargo World article, the air express market is showing signs of a potential slowdown in the second half of the year. FedEx and UPS noted declines in average daily international volumes during the first half of the year. “Our international businesses continue to navigate a dynamic environment,” FedEx Chief Customer Officer Brie Carere told analysts during the company’s June 23 earnings call. “Global trade growth has slowed from disruptions related to lockdowns in China and the conflict in Ukraine, limiting the flow of goods and reducing international export volumes. We anticipate supply chain disruptions throughout the fiscal year.”

While imports are expected to slow, returning export containers to marine terminals continues to be a struggle because of restrictions put on drayage carriers by ocean carriers according to JOC editor Michael Angell. Harbor Trucking Association chief executive Matt Schrap, in a letter to Federal Maritime Commission (FMC) chairman Daniel Maffei and Biden administration port czar Stephen Lyons, said his group’s 400 carrier members have had difficulties returning empty containers to West Coast marine terminals since the advent of container alliances, but the two-year-old volume surge into the United States has made the problem worse.

“This practice has been an unfortunate reality of West Coast drayage operations for many years,” said Schrap. “These issues have merely been exacerbated by the pandemic and the post-pandemic effects of the supply chain.

West Coast drayage carriers face the same challenges as their East Coast peers in returning an empty container to a marine terminal. These include unexpected notices from ocean carriers that a marine terminal will not be able to take an empty container, even while a driver is en route; and difficulties in finding appointments at marine terminals for dropping off empties.

Other challenges include the ongoing chassis shortage. JOC editor Ari Ashe writes that North American chassis manufacturers have run into production delays for the second consecutive year in 2022, slowed by difficulties in sourcing raw components and retaining factory workers, which means widespread shortages of marine chassis may persist until 2024, equipment makers and lessors have told JOC.com.

Meanwhile, Knight-Swift plans to purchase more chassis directly from manufacturers and rely less on rail-owned and third-party pool chassis in the coming years. “We’ve always wanted to have our own chassis, but the challenge was we didn't have a profitable intermodal business for many years, so it was hard to double down until we felt like we were profitable,” CEO Dave Jackson told JOC.com in an interview Aug. 4. “Now that we are [profitable] and we have a good agreement with UP, we are procuring our own chassis. Given our ability to insource drayage drivers, and our ability to leverage the terminal footprint throughout the country, it makes sense that we would do well to insource chassis.”

Jackson said Swift would not necessarily completely stop using DCLI or NS chassis, but rather it would use a combination of internal and external pools to service intermodal shippers.

High freight demand is driving the expansion of LTL networks. JOC editor Bill Cassidy writes that large carriers such as FedEx Freight, Old Dominion Freight Line, and XPO Logistics are adding new terminals and expanding existing facilities, and mid-sized to smaller LTL carriers are also growing, often through acquisitions, such as Pitt Ohio’s purchase of Teal’s Express in New York.

Overall, US for-hire truck tonnage is still rising on a year-over-year basis, according to research by Jason Miller, associate professor of logistics at Michigan State University. The decline in truckload spot market demand represents a shift of demand from the transactional market to contractual transportation providers, not a broader decline in demand, Miller has said in several interviews and a recent JOC webcast.

“Demand right now is a few percentage points higher than where it was back during the prior peak period of 2018, as well as where we were at times last year,” Miller said during the webcast. LTL carriers are benefiting from both rising industrial production and consumer spending that remains strong despite inflation and high inventory levels at some — but not all — retailers.

However, as Knight-Swift plans to acquire more chassis and LTL networks expand, the overall trucking market noted a drop in the US producer price index (PPI) for the second straight month in July, with both truckload and less-than-truckload (LTL) price indexes decreasing slightly.

The PPI for truck transportation, which covers truckload, LTL, and specialized carriers, fell 0.5% from June to July, after dropping 0.5% in June from its peak in May, according to data released by the US Bureau of Labor Statistics (BLS). ?The decreases reflect a drop in fuel prices and surcharges from June and continue a flattening or reduction in contract rates after double-digit gains over the last two years.

Declines in the PPI may likely continue. Data from DAT Freight and Analytics on the DAT Top 50 Lanes shows the average spot rate, excluding fuel, is about to fall below both 2020 and 2021 levels.

In Ari Ashe’s latest Substack post, one shipper told Ashe, “We’re having contract carriers come in and say, ‘I want to reduce my rates to be a good partner with you. And I know that contract rates here, I want to reduce them now.’ So we're starting to see asset carriers come in and actually reduce their rates on the truckload.”

The situation is a bit different with parcel carriers. Couriers & Messengers noted an ever so slight increase in PPI from June to July, 292.860 to 293.142, which may be attributed to lagging fuel surcharges and a USPS price increase that took effect on July 10. Expect the PPI to increase in this group over the few months as parcel carriers announce holiday peak surcharges. FedEx announced its holiday peak surcharges on Aug 5 and the USPS has announced its surcharges on Aug 10. UPS has yet to announce its holiday peak surcharges but expect it to do so in the next week or two.

The impact of these peak surcharges has a ripple effect on online platforms. eBay and Etsy, for example, have announced a shipping tax effective Oct 2. The tax is a commission fee on shipping above and beyond payment-processing charges according to an ecommercebyte article. Beginning in October, for flat-rate Priority Mail package, for example, eBay sellers can expect to pay eBay at least an extra 8 cents per package.

Economic Outlook

Tuesday, Aug 16 – US Industrial Production for July. The expectation is a 0.3% increase in comparison to a 0.2% decline in June.

Wednesday, Aug 17 – US retail sales for July. After a 1.0% increase in June, expectations for July are for little, if any, increase.

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

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Also, if you're interested in more US inland analysis, be sure to check out JOC's upcoming?Inland Distribution Conference.

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