Slack capacity? It won’t last long

Have you been finding it harder of late to find freight, particularly for US bound hauls? Perhaps you’re seeing competitors easing off on rate increases, maybe even backing off on some accessorial charges?
Many motor carriers are reporting a lacklustre first quarter with shipment volumes below expectations. South of the border, where the economy is stronger, the American Trucking Associations Tonnage Index decreased 2.5% in February, marking the first monthly decline since last August and the largest monthly decline in a year.
It’s not a problem isolated to trucking. CN Rail and CP Rail will be releasing their first quarter results later this month and although analysts are anticipating a strong financial showing, that could have more to do with aggressive pricing tactics than significant volume gains. In fact, volume growth at the big six Class One railroads has slowed considerably since 2004, as respected transportation industry analyst David Newman pointed out in National Bank Financial’s Daily Bulletin recently.
Combined, the weakness in rail and truck movements is indicative of volume weakness across the North American freight transportation industry.
Our own Transportation Media Research Buying Trends Survey, conducted in partnership with CITA and CITT late last year and which included freight volume projections from more than 700 shippers across Canada, found shippers in the pulp and paper industry and manufacturers, particularly in central Canada, somewhat pessimistic about their freight volumes in 2006. South of the border inventory corrections at several big-name retailers such as Wal-Mart and Procter & Gamble have been occurring throughout the first quarter. Thom Albrecht, managing director of investment banking firm Stephens Inc., and considered to be one of transportation’s most accurate analysts, has even gone as far as suggesting the tight truckload capacity situation could reverse itself in 2006 with capacity additions slightly outstripping demand (by 1% to 2%) for the first time in several years.
So with first quarter shipment volumes falling short of expectations and capacity not as tight as it used to be, motor carriers (perhaps eventually even rail carriers?) are likely being less aggressive with their pricing. And no doubt smart shippers taking note that motor carriers are not exactly bursting at the seams at the moment are moving up their bid packages for the peak season to take advantage of the current weakness.
That’s the current reality but I think it will be a short term one – for several reasons.
First, concern that manufacturing shipment volumes in Canada are falling far behind those in the US is exaggerated. The divergence began back in September 2004. According to Jennie Wang’s report in the Canadian Economic Observer, from that time till August 2005, the gap between the growth in US and Canadian shipments was 5.2 percentage points with current dollar shipments up 5.5% in the US but only 0.3% in Canada. But, as Wang points out, much of the gap between the growth of shipments in Canada and the United States is due to differences in the prices of manufactured goods as they leave the factory gate. Canadian manufacturers export close to half of all their shipments and often get paid in US greenbacks. Of course, as the exchange rate rose, they received fewer Canadian dollars for their US dollars and so the value of their shipments took a distinct hit. In constant dollars, when the effect of prices is eliminated, the gap between the volume of US and Canadian shipments is practically nil (only 0.3 percentage points).
Second, a good chunk of the capacity growth for motor carriers on both sides of the border is due to concerns about the 2007 engines and their $7,000-$10,000 additional price tags. Many fleets – more than 40% of Canadian for-hire carriers according to our research – are looking to speed up their truck replacement cycle this year so they won’t have to buy trucks with the new engines next year. But they are basically cramming two years of growth into one, artificially and temporarily, boosting capacity this year. Truck manufacturers I spoke to last month were expecting a 30% to 35% drop off in truck sales next year. There’s also anecdotal evidence that fleets hung on to some of their older vehicles anticipating the strong demand for their services from 2005 would continue into 2006, another capacity boost that will likely disappear by 2007. These reasons have led Albrecht to predict the current slack will be followed by a re-tightening of capacity for 2007.
In other words, you’ll have to adjust to the current respite in capacity shortages and upward pressure on rates, but it won’t last long.