Archive for June, 2013

  • Hours of Service

    Hours-of-Service rules changes take effect on Monday

    - by Tom Sanderson

    Highway safety is a high priority for all stakeholders in the supply chain, but so are capacity availability and cost-effective transportation. Shippers, carriers, brokers, and all others who depend on a fully functioning truck transportation network must continue to voice united opposition to changes of the Hours-of-Service rules. The impending capacity constraints are too high a price to pay for feel-good regulations that are unlikely to produce measurable safety improvements. The changes to the 34-hour Restart and the 30-minute Rest Break will result in a 3% to 5% reduction in effective truck capacity. Carriers will be forced to increase rates by a minimum of 3% – 4% to prevent margin erosion that inhibits their ability to invest in equipment providing much-needed capacity expansion.

    The FMCSA has estimated that the HOS rules changes will actually render a net benefit of $133 million annually for the trucking industry. The ATA commissioned an independent study to quantify what most in the industry already understood: capacity reductions equal higher costs. According to their calculations based on a “conservative” estimate of 15 minutes of productivity lost per driver per week, the rules changes will actually cost the industry $189 million a year collectively — a $322 million discrepancy with the FMCSA estimate. With slim margins and high fixed costs, the trucking industry will only overcome this burden through rate increases that will ultimately be passed on to the American consumer.

    The unavoidable capacity reduction demands that shippers of all types and sizes reassess their transportation strategy by embracing Best Practices that streamline their supply chain, thereby increasing efficiency and decreasing costs. Railroad infrastructure investments have made intermodal an increasingly attractive option. Co-loading and private and dedicated fleet capacity represent attractive possibilities for efficiency gains.

    Many pro-business politicians are willing and able to support alternate solutions that not only improve highway safety through proven methods, but also preserve the productivity of the trucking industry. Professionals across the trucking industry must seek to influence future legislation by dialoguing with each other and their local elected officials. The ATA is a formidable force, but the weight of federal regulatory authority was too great for one industry group to overcome.

    Barring an unexpected delay in the implementation of the new rules, shippers must embrace reality and make decisions that enable them to survive in the hostile regulatory environment. Despite the persistent uncertainty and potential harm to the nation’s economy, the new HOS rules will likely be in force on Monday.

    Click here for more information.

    Sources: Wall Street Journal, American Transportation Research Institute, Transplace analysis

  • Ocean Freight

    Ocean rates hit lowest point since March 2012

    - by Tom Sanderson

    After rising slightly in late May, ocean rates fell last week to their lowest level since March 2012. To the west coast, rates are down $937 and to the east coast down $1,114 since the August 10 peak. Rates rose at the end of 2012 and through the beginning of this year, but have since experienced a fairly consistent decline. Rates are now well below prior-year levels with the west coast down $833 (31%) over the same period last year and the east coast down $821 (22%). The Shanghai Containerized Freight Index (SCFI) for west coast ports was $1,845 per FEU and to east coast ports was $2,984 on June 21. The SCFI reflects spot market rates for the Shanghai export container transportation market.

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    Source: Shanghai Containerized Freight Index – Shanghai Shipping Exchange , The Journal of Commerce, Transplace analysis.

  • Diesel Fuel Prices

    Diesel prices fall for fifth straight week

    - by Tom Sanderson

    Weekly retail on-highway U.S. diesel prices fell to $3.838 per gallon on June 24, the fifth straight week of lower prices. This price represents the lowest price level of 2013 and the lowest point since July 2012. Diesel reached its 2013 peak of $4.159 on February 25 and has dropped 7.7% since then. In 2012, diesel prices exceeded $4 for a total of 26 weeks, but has only exceeded that level for 8 weeks so far this year. The recessionary low price point for diesel was $2.023 on March 16, 2009. A view of weekly prices over the last 4+ years exhibits generally higher prices in each year over the preceding year until the last few months. Despite the absence of a cyclical spring price rise this year, diesel is currently about equal to the same-period price of 2012 and 2011. Diesel prices peaked at $4.771 per gallon in July 2008 and were above $3 per gallon from September 24, 2007 to November 3, 2008 (13 months). Prices have been back over $3 since October 4, 2010 (32+ months).

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  • Retail & Same Store Sales

    Retail sales notch another record in May

    - by Tom Sanderson

    Seasonally adjusted real retail sales increased in May to $181.7 billion, the highest level ever recorded. (Note that actual sales are deflated using CPI 1982 – 84 = 100.) Year-over-year growth was 2.9%, a relatively normal figure for  expansionary periods. Nominal (unadjusted for inflation) retail sales totaled $421.1 billion in May (second graph), also the highest level ever recorded, and representing relatively strong growth of 4.3% over 2012. The reason we focus on real retail sales is that the inflation-adjusted numbers are a better indicator of freight movement.

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  • Diesel Fuel Prices

    Worldwide oil consumption increased only 1% in 2012

    - by Tom Sanderson

    BP’s Statistical Review of World Energy is an annual publication with a treasure trove of information about energy production and consumption across the globe and over time. Contrary to popular belief, worldwide consumption of oil is not increasing at a rapid pace. In 2012, worldwide oil consumption grew by 1.01%, from 88.9 to 89.8 million barrels per day. The pace of growth slowed compared to 2011 when consumption grew by 1.19%. Consumption naturally grew faster than normal in 2010 (3.26%), recovering from the 2009 worldwide recession. Over the period from 2000 to 2012, global consumption grew 1.30% annually, and from 1965 to 2012 consumption grew 2.32% annually.

    Regional consumption patterns are varied based largely on a region’s level of economic development. Developed regions have historically experienced slower growth in oil consumption than is the case for developing countries that rely heavily on fossil fuels to meet rapidly growing energy demand. In 2012, consumption grew fastest in Africa, the Middle East, Central and South America, rising 3.68%. This region also experienced the highest Compound Annual Growth Rate (CAGR) of 3.27% from 2000 to 2012 and consumption has grown at a 3.83% annual rate from 1965 to 2012. These areas overtook Asia Pacific as the fastest consumption growth region. Asia Pacific had the fastest growth rate from 1965 to 2012 at 4.83%, but that slowed to 2.85% from 2000 to 2012, and consumption increased by 3.57% in 2012.

    In contrast, the Europe and Eurasia region has experienced the slowest longer term growth in oil consumption. Consumption fell by 2.27% in 2012. This decrease compares with a 0.36% annual decline from 2000 to 2012 and a 1.07% annual growth rate over the 1965 – 2012 period. North America experienced a smaller consumption decline in 2012, coming in at -1.52%. This rate compares with a 0.24% annual decline from 2000 to 2012 and a 1.24% annual growth rate over the 1965 – 2012 period. For reference, the U.S. population and U.S. oil consumption have both grown by 1.02% annually since 1965 (note that Mexico’s 4.2% CAGR in oil consumption boosts the North American total).

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    The long period of slow growth in oil consumption in North America and Europe has dramatically shifted global oil consumption market share. Whereas those two regions previously consumed the vast majority of the world’s oil (79.5% in 1965), in 2009 the most developed regions dropped below 50% of worldwide consumption for the first time. Asia-Pacific eclipsed North American consumption in 2006 and has widened the gap since then, now accounting for 33.2% of world demand. The Africa, Middle East, Central and South America region will likely surpass Europe & Eurasia in terms of total oil consumption in 2013.

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    Certainly, we need to do everything reasonable to reduce the consumption of oil without sacrificing economic growth. The North American shale oil and gas boom represents a promising source of domestic supply that will significantly diminish, if not completely eliminate, our dependence on foreign oil. It is imperative that we take full advantage of these resources because we have a long way to go to achieve energy independence. The BP data shows that the U.S. is already a net exporter of refined oil products exporting 2.657 million barrels per day while importing 2.096 million barrels. Crude is another matter. We import 8.5 million barrels per day while exporting 23 thousand.

    There is no need to wring our hands about runaway growth in domestic and worldwide oil consumption because, quite simply, that is not the case.

  • Morgan Stanley Graphs

    Refrigerated capacity is tight, but that is normal for mid-year

    - by Tom Sanderson

    Morgan Stanley’s refrigerated freight index indicates capacity started 2013 tighter than in previous years but dropped to about a normal level in the last few months.This is consistent with our view of the market. At this point in the year refrigerated capacity is very tight, as has been the case in most years. Given how tight capacity was in January, it is a relief to see the index has not quite reached the levels of 2010-2012 for this time of year. Typically capacity eases a little in the upcoming months, but the hours-of-service change could impact that and lead to tighter capacity through the end of the year. The pricing environment in this segment favors the carriers. No significant capacity is entering the industry and demand for refrigerated transportation is less correlated to general economic sluggishness. The index measures incremental demand for refrigerated truckload services compared to incremental supply. The higher the index the tighter is capacity relative to demand when compared to a prior period.

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    Graph reproduced with permission from Morgan Stanley. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

  • Morgan Stanley Graphs

    Flatbed capacity remains readily available despite housing recovery

    - by Tom Sanderson

    Morgan Stanley’s flatbed freight index continues to show significantly greater flatbed capacity availability than normal for this time of year. Since Q2 last year, the flatbed index has fallen and remained low indicating more readily available capacity. In Q1 and into Q2 of 2013 the market looks more like ‘07 and 09 than the post-recession years. With the uptick in housing starts and oil-field strength, it is surprising that flatbed capacity never did tighten as much in 2012 and into 2013 as it did in 2010 and 2011.  The second half of the year typically brings a steep decline in the index, but starting from such a low point it seems unlikely the index will fall as fast as in previous years. This is consistent with what we have seen with our flatbed-centric customers. The flatbed market was particularly hard hit by the fall off in housing starts, but had gained ground with the growth in U. S. manufacturing. The index measures incremental demand for flatbed truckload services compared to incremental supply. The higher the index the tighter is capacity relative to demand when compared to a prior period.

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    Graph reproduced with permission from Morgan Stanley. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

  • Morgan Stanley Graphs

    Dry van capacity is tightening, but what will the second half of 2013 look like?

    - by Tom Sanderson

    Morgan Stanley’s dry van truckload freight index indicates that capacity is tightening, but still remains somewhat more readily available than normal for this time of year. Capacity was easing from late March through early May, but has been tightening since then and has returned close to the longer-term average. In 2010, 2011 and 2012 capacity tightness peaked around this time and then became much more readily available through the second halves of the years. It appears that the hours-of-service change will take effect July 1, which will remove 2-3% of effective capacity from the highways. Given that freight is somewhat soft, that will probably not be enough of a hit to drive a significant shortage this year. Given the weak GDP performance in Q4 and the January tax hikes, we expected to see lackluster freight volumes and readily available TL van capacity for the first half of 2013 and that was the case. The index measures incremental demand for dry-van truckload services compared to incremental supply. The higher the index the tighter is capacity relative to demand when compared to a prior period.

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    Graph reproduced with permission from Morgan Stanley. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

  • Auto Sales & Assemblies

    Auto assemblies continue to progress towards 11-million unit annual pace

    - by Tom Sanderson

    Annualized U.S. assemblies of autos and light trucks increased slightly to 10.8 million (seasonally adjusted) in May, the seventh straight month above a 10 million unit annual pace. Assemblies dropped in the August to October period during 2012, but have since recovered. Our graph is a 3-month moving average of the seasonally adjusted annualized assemblies. Year-over-year percentage growth using the three-month moving average is relatively strong at 7%, but with stronger year-ago assemblies, the percentage growth rate is slowing down. Average monthly seasonally adjusted assemblies were 11.4 million from January of 2001 through December of 2007.

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  • Housing Starts, Sales, and Inventory

    Housing starts increase, but remain below February and March levels

    - by Tom Sanderson

    Housing starts increased to 914 thousand in May from 856 thousand in April (seasonally adjusted annual rate – SAAR).  Total starts fell short of the 1.021 million pace recorded in March, which was the first time back above 1 million in 56 months. Housing starts totaled 782k in 2012 up from 612k in 2011. Single unit structures totaled 599 thousand (SAAR) in May, flat with April. Total starts reached a low mark of 478k in April of 2009, while single unit starts bottomed out at 353k in March of 2009. Housing starts still remain far below the average of just over 1.5 million per year over the last 40+ years, and even farther below the 2.2 million peak of the most recent housing boom.  Since 1968, the U.S. population has grown from 200 million to over 300 million. Low housing starts not only impact transportation demand for building products but also for appliances, furniture, and other related items. One analyst estimates that each housing start generates 8 truckloads of freight. The vertical bars represent recessions.

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