Service center operators don’t have to scramble as much these days to find a carrier for their steel, aluminum and copper orders. It’s become a shipper’s market, experts say—at least for a little while.

“We are seeing a bit of a reversal on where the supply-demand equation had been over the last couple of years,” says Mark Shary, president of BestTransport.com, Columbus, Ohio. “It’s segment specific, even within the metals industry, with certain segments moving more tons. But overall, flatbed carriers are seeing a softening in the demand for trucking.”

Some analysts even describe the current market as a “freight recession.” One of those is Eric Starks, president of FTR Associates, a Nashville, Ind.-based firm that specializes in forecasting freight transportation needs. His assessment takes into account shipments of all kinds of freight, which have slowed across the board.

“We’re in an inverse situation right now, with more trucks than freight,” says Larry Hall, transportation director for Heidtman Steel, Toledo, Ohio. “Or at least it’s far closer to even.”

Steve Williams, president of Maverick USA, Little Rock, Ark., one of the largest steel transport companies in the U.S., says the market started to turn in August 2006 and nose-dived in the fourth quarter. “There’s been a steady erosion of profits since then,” he adds.

The cause of the freight recession in the transportation sector overall—and the metals industry in specific—is the source of considerable debate. Many analysts point to significant truck purchases at the end of 2006, as fleet owners tried to replace equipment before the expensive new engine emissions standards of 2007 went into effect. Starks says companies may have overbought by as many as 110,000 units in 2006.

But Williams doesn’t believe the overindulgence in truck purchases in 2006 is having much of an impact on the supply-demand balance.

“I keep hearing analysts talking about this fundamental supply-demand change that they attribute to the pre-buy for ’07 engines. That just blows my mind,” Williams says. “It has nothing to do with the number of trucks on the road, because it takes a driver to drive a truck. I can show you where there are 200 trucks right now. If I had drivers for them, they’d be on the road.”

Williams says the simple reason behind the change from a carrier’s market to a shipper’s market is the absence of freight in the system. From a metals standpoint, data from the Metals Service Center Institute, Rolling Meadows, Ill., supports that viewpoint. For the first four months of 2007, service center steel shipments dropped by over a million tons—a 5.4 percent decline, from 19.24 million to 18.21 million tons, compared to the same period in 2006. A similar pattern has emerged for aluminum, copper and other materials.

In addition, the drawdown of inventory taking place at the service center level has reduced shipments from mills to distributors. Service center inventories have declined 11.3 percent since the start of the year, according to MSCI.

How long will the so-called freight recession last? Some analysts believe North America is already shifting out of the condition, while others expect the volume of trucks to exceed the volume of loads until sometime in 2008.

“We’re kind of in between,” says Starks. “Things aren’t getting worse [for trucking companies], but we’re not seeing them get better. The earliest we see it turning around is late 2007.”

Shary, whose company provides internet-based logistics solutions, says the current market is an ideal time to assess transportation programs.

“By and large, we have a pretty rational environment right now, and it’s giving both sides of that community, the shippers and carriers, the chance to take stock of their mix of suppliers and mix of customers. It’s a heavier planning and negotiating environment than it’s been in a while,” he says.

The wild shift from tight supply to excess capacity of trucks has not had a significant effect on rates, which Shary describes as fairly inelastic. “It does adjust, but with the severity in swings that we’ve seen between supply outstripping demand to demand outstripping supply and back, the rates don’t move as dramatically as the demand-supply curve.”

Though the current condition for freight may be favorable for service centers and other metals companies, most don’t expect it to last. The fundamental issues that dogged the industry over the last two years have, for the most part, not been resolved. Consequently, if the economy improves and shipments of various goods increase across the board, many see the metals sector returning to the tight transportation environment of 2004-06.

Expectation of renewed tightness in trucking is based, for starters, on the shortfall of qualified drivers. There is no simple solution to this human resources issue, analysts concede. 

Williams says the driver pool is growing at less than one-half of one percent annually, far behind the nation’s average economic growth of 2.5 to 3.0 percent. “Finding, training and retaining qualified drivers is going to be even more challenging in the years ahead,” he says.

Even if the driver pool kept up with the overall economy, it wouldn’t necessarily be true for steel haulers, says Gordon Gustafson, chief commercial officer at ADS Logistics, Homewood, Ill. “To say there are X number of drivers does not say how many may be available for flatbed hauling. That’s a unique animal.”

Flatbed hauling is more difficult and time consuming than enclosed vehicles loaded by forklift, since drivers must help secure and tarp each load, which is hoisted on the flatbed by crane. That thins the pool of potential flatbed drivers.

In previous years, flatbed companies were able to combat that with the attraction of better pay and the promise of more time at home. But large public companies have since raised their drivers’ pay and schedules to a level comparable to the flatbed sector.

Companies such as Maverick USA are now investing more heavily in training programs to meet the demand for their services. A 10-week program produces drivers who are “confident, capable and appreciative, and they do a better job on fuel economy,” Williams says. “But it’s expensive.”

Even the best-trained driver is subject to the government hours-of-service regulations imposed in 2004. The safety regulations limit drivers to 14 hours of consecutive service time, which includes the time spent loading and unloading. Trucking companies, which contend that the hourly limit is too restrictive and costly, are awaiting a final ruling from the Federal Motor Carrier Safety Administration on the existing regulations. The agency may leave the standard as is or modify it, possibly even requiring installation of electronic on-board recorders in all trucks to monitor driver performance, which would add further cost.

Of course, there is the one transportation cost that impacts everyone in the chain. “We’re faced with relentless fuel costs,” says Greg Malarney, director of transportation for TW Metals, Exton, Pa. Diesel fuel costs have escalated from an average $2.46 per gallon at the beginning of the year to $2.87 in April, according to the Energy Information Administration.

Service center operators never welcome the growing fuel surcharge assessed by freight companies, but it’s an absolute necessity, says Hall, who was a transportation manager in the trucking industry before joining Heidtman.

“None of us likes to pay that fuel surcharge. But if you don’t compensate that carrier, he won’t be around your freight in a year,” says Hall.

Williams agrees that many freight companies are already teetering on the brink of bankruptcy, if they haven’t already dropped.

“Some members of the carrier community are just worried about cash flow and are willing to do whatever it takes. They match up well with shippers who don’t have a long-term vision. They’re selling at the spot market. Those people, quite frankly, won’t make it much longer,” he says. “There are an awful lot of carriers who are dead; they just haven’t fallen over yet.”

So what can service centers do to improve their future prospects for shipping material? It starts in the warehouse, say logistics experts, by making every effort to limit the amount of time a truck and its driver are on the premises.

“Dwell times on the trucks at their facility need to become a priority,” says Hall, whose company does most of its hauling through its own fleet. “The trucks do not generate revenue if they’re sitting on line waiting to be loaded or unloaded. If you’re going to consistently take three to four hours to unload a truck, your rates are going to reflect that. If you can get them in and out in an hour, your rates are going to reflect that, and you’re going to become very attractive to more carriers.”

Becoming more open with schedules and plans with the carrier community is another way to deliver a more cost-effective transportation network, says Gustafson. “We call that the glass pipeline. The more we can see of what your production is going to be to satisfy the demands of your customer, and the more we can plan our resource allocation, the better off everybody’s going to be.”

Some shippers are hesitant to embrace transparency. “It’s not the first reaction either side has, but it always proves out,” says Shary. “The market plays Solomon pretty well when you have transparency. It’s not that bad things can’t happen, but the good things outweigh them.”

Transparency is more than just putting in a new computer system and dumping all of your work in the lap of the carriers, says Williams. His company works with as many as 20 different logistics networks, which can be unwieldy. “We do want more visibility with our customers, but now the system’s not very efficient,” he says. “It doesn’t seem like we’ve made it very far past Big Chief tablets and No. 2 pencils, even though we’ve spent a lot of money.”

There is some hope on that front, Shary says. Though rationalization isn’t complete, there has been some winnowing of online logistics providers. “Instead of figuring out which of a dozen to focus on, the market has started to narrow the choices down to three or four.”

One way the metals industry could aid its future transportation prospects would be to throw its considerable political weight behind trucking industry efforts to increase the size of allowable loads, Williams says. The American Trucking Association is lobbying Congress to increase the weight limit on trucks to 97,000 pounds. The ATA is hoping the limit is increased when the federal highway program is reauthorized in 2009.

The current limit, five axels and 80,000 pounds, was passed in 1982. But with numerous technological advances, such as roll stability, improved braking performance and other developments, today’s trucks can safely handle more weight, Williams says. Moreover, some safety concerns about higher weights can be mitigated by the potential for fewer trucks on the road.

Historically, opposition from railroads and safety groups has effectively killed calls for increased truck weight limits. But Williams believes railroads’ opposition may be softening, since they’re already getting more freight than they can handle.

“The increased weight limit, more than anything else, would have a fundamental impact on our ability to lower ton-mile costs. There’s a tremendous safety, environmental and economic benefit,” Williams says.