Uncertainty abounds as we begin to look forward to the New Year. Election clarity and virus/vaccine issues aside, a key concern for freight management specialists is the cost of transportation in 2021.
As we have seen in 2020, freight patterns and rate levels can shift suddenly, so it pays to have a strong awareness of factors that can affect the marketplace when bidding on future freight.
Bid on RFPs with confidence using the pricing and forecasting tools in RateView from DAT iQ.
Current state of the freight marketplace
Strong. Since May, demand continues has exceeded supply, leading to record high spot market rates. Contract rates followed but spot rates continue to run ahead. In fact, starting in August, spot rates nationwide rose above the national contract level. We have only seen that happen a few times in past periods like the polar vortex in the winter of 2013-14 and ELD mandate build-up in late 2017 through 2018.
The overall economy continues to improve, albeit slowly. Certain sectors have been left behind, but sustained rises in activity elsewhere show no signs of slowing, even without a new stimulus bill.
Will there be a recession?
Probably not. Maybe. Ten million workers having lost employment continues to be a drag on the economy, especially as stimulus money dries up, but it’s hard to reconcile the current state of the freight marketplace with a recession. Still, another lockdown could put a hard stop on economic activity, then the restart could cause the whole cycle to repeat.
The last major rebound was in 2017, driven by the rapid expansion of oil and natural gas activity. That all began to cool in 2018, as energy production got ahead of demand. Then followed the worldwide drop in energy consumption in early 2020, causing the price of oil to plummet and leading to a near shutdown of US oil fields. Out of more than 1,000 drilling rigs in operation nationwide at the start of the year, the US fell below 250 rigs in operation. That’s recovered to 312 rigs in operation as of mid-November, even as diesel and gas prices remain low. While prices have remained low, keeping diesel and gas prices down, oil & gas well activity has begun to rise in recent months.
Industrial production continues to rise in the US. Internationally, both imports and exports are sharply higher in recent months. In part, new trade deals with Mexico and Canada (USMCA) and a cessation of trade disputes with China have helped provide more sustainability. Inventory positions remain low for customers and the rapid roll-out of vaccines in the first six months could add further pressure to supply chains.
Find loads and trucks on the largest on-demand freight marketplace in North America.
What’s driving the economy
Low interest rates are likely here for at least the next two years. This keeps the cost of borrowing down, keeps housing mortgage rates low and generally provides stimulus across a wide spectrum of the economy. Fortunately, inflation remains in check overall, despite some sharp price rises for some key materials like lumber.
Strategic pricing
Some shippers exploited the sharp drop in demand in the spring to enforce much lower rates. Key lanes like Los Angeles to Chicago nearly dried-up, hitting low points for the deregulated era, 1980 to now. The resulting sharp rebound caught many by surprise and continues to strain shipper budgets.
For carriers, this RFP season looks primed for strong, profitable contract rates. Carriers can trade some short-term profits for a guarantee of stability. Conversely, shippers and carriers could agree that the situation is fluid and create more flexible pricing arrangements, such as 3-month reviews.
A couple of things have changed in 2020 that shippers, carriers and brokers will also have to consider. First, driver mobility has been reduced. It’s not as easy to relocate, let alone find, truck drivers from overseas because of various restrictions. Many older drivers may have exited the workforce, and it’s likely that the increased use of hair follicle testing has tightened driver supply.
If the various vaccines under development prove effective, that is an additional source of economic expansion as the hospitality industry comes back. My thought is that there is a lot of pent-up demand for travel and other experiences outside the home. For this reason, I think the first six months of 2021 will be solid from a carrier pricing standpoint.
The downside is that there is a danger that we can’t quite get the coronavirus under control to fully reopen the economy. Certainly no one wants that scenario. If the stock market is any gauge, it’s betting strongly that we will avoid the worst case. Politically, almost everyone can agree that we aren’t in an ideal situation, for various reasons.
Tactical pricing
Understanding and responding to changes in the spot market with nimble moves can be another way to get rewarded. DAT iQ tools now contain forecasting elements that provide both a one week look ahead as well as longer term projections. As an analyst using the DAT datasets, I could often get ahead of developing market changes. And with the addition of the new 3-day averages, you can get the closest to real-time view available on the most volatile lanes in the country.
Surveys of a number of small-to-medium size fleets find that locking up all capacity into contracts may not provide the best return on investment. It’s been harder in the past year to place trucks in the right market at the right time. In years past as a dispatcher trying to service contract customers, I found many instances of having to deadhead a truck many miles to meet the needs of the shipper. An optimal mix of freight may be 70% contract and 30% spot or 80/20 rather than 90/10. Some major carriers used to strive for 95% contract and 5% spot, and they are seeing the value of having a few more trucks free of contract obligations on the spot market.
As long as we continue to see disruptive elements in the freight marketplace, this more recent trend should remain true. Stability would be great but it looks elusive.
