It almost goes without saying: A lot has changed as a result of COVID-19. But what about freight transportation rates? How has the global pandemic impacted the trucking market? And what can shippers expect for the rest of 2020?
Earlier this year, I jumped into the fray with my thoughts and opinions on the driving forces behind truckload pricing in 2020. Not surprisingly, a pandemic and its impact on domestic and global supply chains were not a part of my rate forecast. So, I want to revisit this topic in light of the brave new world in which we find ourselves.
How we got here
Plain and simple, as I explained in my original prediction, it always boils down to supply and demand. At the beginning of 2020, there was an overhang of supply – i.e., drivers and equipment – originating from robust investments made in 2018 and 2019. Excess supply combined with demand that, while not lackluster, was lower than the available supply, it was easy to predict that both spot and contract rates would fall in Q1-2020. And that’s precisely what happened.
When COVID-19 abruptly entered the U.S. scene in the middle of March and led to a consumer buying frenzy, trucking volumes spiked 10-15%, only to crater a month later – volumes in April were down over 20%. Spot rates followed a similar rollercoaster-like trajectory. However, if you zoomed in to the industry level, it was quite a different story. Some food and other consumer goods manufacturers saw their demand and load volumes skyrocket over 60% year-over-year during the initial panic buying period. Industrial shippers saw their volumes swing the other direction by a similar percentage.
Plain and simple, it always boils down to supply and demand.
This quick and dramatic shock resulted in a widespread dislocation of trucks as most of the usual networks of lanes were thrown massively out of whack. Volumes improved in May relative to April, but they were still down around 5% compared to the same period in 2019. June volumes surged on the strength of the retail sector as U.S. states started to reopen their economies. Spot volumes have returned and even exceeded prior-year levels lately, pulling spot pricing up as well. Contract pricing has held for the most part so far. Will that continue?
Looking forward to the rest of 2020
My pre-pandemic prediction was that we would eventually see the supply and demand equation come back into balance (bringing some pricing increases) in the back half of 2020. All told, I predicted contract rates to be 1-2% higher by the end of 2020.
While spot volumes and rates have surged recently, I do not think it is indicative of a tightening market that will cause contract rates to go up. With the amount of uncertainty present in our lives, our schools, our workplaces, and our economy, I don’t think we’ll see a tremendous amount of pressure on pricing in the rest of 2020. That market pressure is likely pushed out to Q1 or Q2-2021 at this point.
Why? Say it with me: It always boils down to supply and demand.
On the demand side, GDP growth is expected to be flat to moderate in 2020 and freight demand tends to move with the overall economy. No doubt, as a result of COVID-19, the U.S. Commerce Department recorded the most significant drop ever in Q2-2020 with GDP falling at an annualized rate of 32.9%. With V-shaped, U-shaped, W-shaped, and “swoosh”-shaped recoveries bandied about, it’s difficult to determine exactly how demand will shake out. However, with COVID-19 cases spiking over the last few weeks and some U.S. states slowing their openings or re-entering lockdowns, I struggle to see demand returning in such a way in 2020 that would cause significant price inflation.
Initially, I thought the supply side would be what led the late-2020 inflationary charge. However, we’re halfway through the year, and there is just as much uncertainty around supply now as there is demand. The supply headwinds that we foresaw building may still appear, but likely in different forms and for different reasons.
- Reduction in available drivers and driving hours: We were worried about ELDs, AOBRs, and the Drug and Alcohol Clearinghouse shrinking the pool of qualified drivers. Whatever effect these issues might have had was overwhelmed by the pandemic. Driving hour regulations were even relaxed for a while. There may be fewer drivers on the road now, but that’s primarily driven by lower demand and drivers wanting to avoid exposure to COVID-19 rather than any regulatory issues discussed earlier in the year.
- Reduction in the number of trucks on the road: It isn’t uncommon to see an uptick in carrier bankruptcies when rates are in a downward cycle, and 2019-20 is no different. Numerous bankruptcies happened in 2019 (e.g., Celadon, New England Motor Freight, Falcon Transport, etc.), and we thought there would be more in 2020. The Paycheck Protection Program (PPP) has helped keep some trucking companies afloat during the last few months. If PPP isn’t extended, it won’t be surprising to see carrier bankruptcies rise. It certainly seems we are going to see a capacity shakeout due to the pandemic. The question is when.
- Diesel prices: We thought fuel would be a headwind that would push pricing up, but the pandemic overwhelmed that too. Oil demand plummeted across the world. And the IMO 2020 regulations (which were focused on lowering sulfur content in bunker fuel and were thought to have inflationary spillover effects for diesel fuel markets) became a non-issue.
Many thought we hit a “new normal” in 2018, but 2019 and the first half of 2020 have shown us that the truckload pricing cycle is alive and well. It seems the pandemic may have changed the concept of “normal” for at least a few months, if not years.
What the pandemic hasn’t changed is the need for a portfolio management approach when building your transportation strategy. Resist the urge to use a depressed market to massively consolidate your carrier base. When the market turns – and it will – you will not have enough capacity available and committed to your relationship, ready and willing to haul your loads. Beyond the carrier portfolio, a shipper should also be building a collection of different modal options (i.e., intermodal, common carrier, dedicated fleets), and contracting options. It is essential for all shippers to determine where to use index-based contracts versus annual sourcing exercises, minibids, and the spot market.
A systematic approach to freight transportation can make navigating disruptions like COVID-19 easier. Chainalytics’ combination of top supply chain talent, proven methodologies, and exclusive market intelligence consistently puts our clients ahead of the curve. Reach out to us to learn how Chainalytics’ experienced transportation consultants can help you make a lasting impact.
Kevin Zweier is Vice President of the Transportation consulting practice at Chainalytics. In this role, he manages the delivery of projects related to transportation procurement, fleet modeling, and systems and operational assessments.
