Freight Market Shifts into Lower Gear

Date: Friday, May 24, 2019
Source: The Wall Street Journal

Moderating demand, weaker prices are raising concerns among goods-haulers after last year’s red-hot U.S. shipping market

Sagging prices and mixed economic signals are casting a cloud over the U.S. freight market as bad weather and trade concerns bog down the spring shipping season.

Demand for moving consumer products, industrial parts and other goods has been pulling back, according to transportation experts and some freight-industry measures, just at the time when freight operators start gearing up for a seasonal shipping surge that typically peaks between July and September.

The softer market is a contrast with last year’s freight boom, which saw retailers and manufacturers scrambling to find space on trucks. Shipping rates soared at a double-digit pace, battering transportation budgets for many companies. This year, cargo volumes have moderated and trucking capacity is more readily available, giving shippers more leverage on price than in 2018.

Prices on the spot trucking market, where businesses book last-minute transportation, were down 16% in April compared with the prior year, according to online freight marketplace DAT Solutions LLC.

The Cass Freight Index for shipments dropped 3.2% in April, the fifth straight month in negative territory. Cass Information SystemsInc., which handles freight payments for companies and produces the monthly index, says the weakening numbers could signal a possible broader economic contraction.

Other measures show sharp swings in shipping demand amid uncertainty in U.S. trade and poor weather this year that has disrupted supply chains. The American Trucking Associations’ for-hire truck tonnage index jumped 7.4% from March to April after declining the previous two months.

“I think we’ve got enough freight in the pipeline to feed us through Fourth of July weekend,” said Mark Montague, DAT’s senior pricing analyst. “I’m really afraid it could fall off in July and August,” he said, if shipping volumes fail to pick up in June and no trade deal materializes.

Inventory levels have been creeping back up at businesses that push goods through logistics networks. U.S. retail sales declined in April and factory activity slowed.

Shippers remain cautious, with many companies holding back on spending as they wait for clarity on U.S. negotiations with China and other key trading partners, said Allison Landry, a transportation analyst with Credit Suisse AG.

“The environment is really uncertain,” Ms. Landry said in an interview. At a recent rail shipper conference, she said, “the common phrases I heard over and over were, ‘We’re going to wait and see what happens’ and ‘I hope we don’t talk ourselves into a recession.’”

The year got off to an uneven start. Freight volumes declined and trucking capacity loosened as fleets that plowed their 2018 gains into record equipment orders took delivery of new big rigs. Severe flooding across the Midwest swamped logistics networks at a critical period for agriculture shipments, while cool, wet weather in California put a damper on the start of the produce season.

In March, Chattanooga, Tenn.-based trucker Covenant Transportation Group Inc., whose customers include Amazon.com Inc., lowered its first-quarter profit outlook, citing inclement weather and softer demand after shippers pulled freight forward in late 2018 to avoid expected tariff increases. Carriers including J.B. Hunt Transport Services Inc.,Schneider National Inc. and U.S. Xpress Enterprises Inc. also cited bad weather among factors weighing down first-quarter results.

At Knight-Swift Transportation Holdings Inc.,the largest truckload carrier in North America, first-quarter adjusted operating income jumped 15% compared with 2018. But tractor productivity fell, and the company cut its overall profit outlook for the second and third quarters.

Railroad volumes declined in each full month from February to April, according to the Association of American Railroads. So far this year, only petroleum and petroleum products among railroads’ major commodities have increased from a year ago.

Analysts caution that last year’s freight market set an unusually high bar for growth in 2019. Compared with cargo volumes and prices in 2017, “the 2019 data isn’t nearly as bad as people are making it out to be,” Cowen & Co. analyst Jason Seidl said in a May 22 research note.

Shifting supply chains as companies move some production from China to Southeast Asia or Latin America have also “contributed to the unsteadiness in transports,” and the impact will extend “throughout the first half of 2019, at a minimum,” Mr. Seidl said.

Still, truckload rates are expected to drop 5% by the end of the year, according to ACT Research. “With the industry awash in capacity, trucker profitability is expected to roll over in earnest by the second half of 2019,” said ACT President Kenny Vieth. “There are some strong headwinds.”

 

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