Chain of Thought

Mediocre Is Looking Pretty Good for Shippers These Days

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Believe it or not, shippers are living in the "good ol' days" right now, based on relatively stable (i.e., mediocre) shipping conditions.

The current market reality for shippers is that mediocrity represents a significant improvement over the past couple years of lousiness, based on the latest industry analysis from FTR, a freight transportation forecasting firm. The FTR Shippers Condition Index for July 2015 stood at -1.3, a score that, while negative, reflects the short-term stability of capacity utilization and steady fuel prices—conditions that are helping shippers contain costs somewhat.

Don’t get too comfortable with mediocrity, though. FTR says it expects the index to fall gradually during the balance of 2015 with a more severe negative downturn in 2016 due to forecasted stronger freight conditions and rising fuel prices.

The Shippers Conditions Index is a compilation of factors affecting the shippers transport environment. Any reading below zero indicates a less-than-ideal environment for shippers. Readings below -10 signal that conditions for shippers are approaching critical levels, based on available capacity and expected rates.

“Shippers continue to operate in an environment in which freight demand is okay, but not great, and capacity is available, but not abundant,” observes Jonathan Starks, director of transportation analysis at FTR. “The supply and demand equation for trucking has certainly loosened during 2015 but is still operating at historically tight levels. This has enabled carriers to continue their work on raising base rates, while at the same time shippers are still benefiting from the rapid reduction in fuel costs at the end of last year (and occurring to a minor degree right now).”

To date, the drop in fuel has been enough to overcome the raises in contract rates, Starks notes. That will change, however, “once we hit 2016 and the low fuel prices will be reflected in year-over-year comparisons. Truck rate data coming from Truckstop.com highlights that the spot market has softened considerably from last year, with pricing (excluding fuel) down over 6%. This should be a positive for shippers in the near-term since we expect contract pricing to reflect that behavior, and many shippers should see smaller base rate increases during winter negotiations. The big caveat is that the regulatory environment still looms large, although it is looking more like a 2017 phenomenon rather than 2016.”

Meanwhile, in an entirely separate freight index report compiled by Cass Information Systems, freight shipments and payments both rose in September 2015 following two months of decline. In recent history, September has represented the final growth spurt for the year.

According to Rosalyn Wilson, a senior business analyst with Parsons as well as the author of the CSCMP’s annual State of Logistics Report, many factors are affecting the current volume of freight, including mounting inventory levels. “All business inventories are continuing to grow, as are inventory-to-sales ratios,” Wilson notes, “indicating that we are not at optimal levels given inventory turnover rates.”

While low interest rates, favorable import prices and moderate storage costs have encouraged the buildup of inventory, “even a 1% rise in interest rates could fuel a 2.3% rise in total logistics costs at current inventory levels,” Wilson cautions. “With the Federal Reserve choosing not to raise interest rates at its recent meeting, yet not ruling out an increase prior to year-end, the potential for an uptick in consumer spending and a drawdown in inventory levels is uncertain.”

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David Blanchard

During his career Dave Blanchard has led the editorial management of many of Penton Media’s best-known brands, including the company’s flagship title, IndustryWeek, as well as Logistics...
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