July 2016
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Shipping's a Buyer's Market
 
By Myra Pinkham, Contributing Editor
 
Truck, rail and barge capacity remain readily available as shipment volumes lag last year.
 
One upside of the downturn in orders this year is the ample capacity of trucks, railcars and barges to move metal. But availability of trucks could tighten in 2017 and 2018 if metals demand picks up at the same time new federal highway safety regulations take effect, say the experts.

In the U.S., approximately 77 percent of metal products are transported by truck, while 16 percent are transported by rail and 7 percent go by barge, estimates Christopher Plummer, managing director of Metal Strategies, Inc., West Chester, Pa. Industrial truckload transactions

declined 12 percent in the first quarter, compared with the first three months of 2015. At the same time, metals railcar volumes declined 10 percent and barge loads declined 18 percent. Greg Burns, president and chief executive officer of PLS Logistics Services, Pittsburgh, points to several reasons for the declines, including the strong dollar, which inhibits metal exports from the U.S., and general weakness in the industrial economy, particularly the energy sector.

Domestic steel shipments declined 0.7 percent through the first four months of the year, while imports dropped by 34.2 percent and exports dipped by 11.7 percent. Service center shipments declined by 8.4 percent. The net result was a significant decline in loads of steel looking for a way to customers. The scenario is much the same for aluminum and copper products.

Though still weak, metals transportation volumes improved in the second quarter, helped by recent steel trade case filings, Burns says. On the whole, transportation capacity remains readily available.

This mirrors overall freight transportation trends, says Charles Clowdis, managing director of transportation for the economics and country risk service of IHS, Inc. He blames much of the transportation sector’s excess capacity on the sluggish U.S. economy. “With GDP growth limping along at 0.8 percent in the first quarter, a lot of people are just sitting on their hands.”

Much of this lethargy can be traced to the energy sector, where exploration and production companies have sharply curtailed drilling due to the low oil and natural gas prices. Baker Hughes, Inc., reports that drilling activity was down 54 percent year on year in May, on top of a 60-plus percent decline last year.

The U.S. manufacturing sector also is feeling downward pressure from weakness elsewhere in the world, which is hurting U.S. exports. “What is happening in China is especially worrisome,” says Eric Starks, chairman and CEO of FTR Logistics, Sharon, Ind., commenting on the slowdown in the Chinese economy. The Federal Reserve reported that U.S. industrial production was down 1.1 percent year on year in April.

Optimistically, the first quarter may prove to be the weakest of the year both for the U.S. economy and transportation of freight, says Bob Costello, senior vice president and chief economist for the American Trucking Associations. ATA’s April for-hire truck tonnage index was up 2 percent from a year ago. He predicts U.S. GDP growth could reach 3 percent by the fourth quarter, helped along by much lower inventory levels throughout the supply chain.

U.S. rail traffic through early June was down 8.1 percent, including a 6.9 percent decline for metallic ores and metals, reports the Association of American Railroads. While volumes of steel coil being transported by rail have begun to grow, other steel products, such as energy tubulars, continue to lag, says Greg Harkey, director of metals and construction sales for the Norfolk Southern Corp. Norfolk Southern, which has the largest fleet of metal-related rail cars in North America, has been sizing its fleet to match the lower demand, in some cases putting cars aside until demand picks up. Gondolas are widely available given the recent softening of scrap demand, while most coil and flat cars are fairly well utilized. Tanks cars used to transport oil also are readily available, he says.

It’s not surprising that tubular steel shipments haven’t increased yet even though oil prices have begun to rise.

“Not only is there usually a lag, but inventories will need to be worked down before more tubular products are needed,” says Harkey. “I think we are well positioned for further growth once the energy sector rebounds.” Rising steel prices earlier this year have boosted shipments of steel coils, he adds.

Barge traffic is even weaker than the other two modes, down about 40 percent from a year ago, says Sandor Toth, publisher of River Transport News. “Coal has been hammered, and volumes of many other types of raw materials are also down.” Metals volumes have been affected by the idling of several riverside mills, including U.S. Steel Corp’s Granite City, Ill., facility, AK Steel Corp.’s Ashland, Ky., plant, Alcoa, Inc.’s Warrick, Ind., operations, and Noranda Aluminum’s New Madrid, Mo., smelter. As result, he says, many barges are tied to the bank.

Like Costello at ATA, Ron Brown, corporate transportation manager for Olympic Steel, Inc., Bedford Heights, Ohio, is optimistic about the rest of the year. Olympic Steel’s volumes, like shipments at many metals service centers, fell about 10 percent last year, but they are already starting to pick up, helped by increased order activity and recent steel price increases. Trucks are easily available, with no bottlenecks, reports another service center executive, Jim Barnett, president and chief executive office of Grand Steel Products in Wixom, Mich. “The recent improvement in steel business has not affected the ability or inability of companies to find flatbed trucks for steel or covered gondola trucks for scrap,” Barnett says. But as the economy and steel market improve, truck availability could tighten, says Lisa Goldenberg, president of Delaware Steel Co., Fort Washington, Pa. Like steel, the transportation sector has gotten more volatile and unpredictable, she adds.

“Overall, it has been a fairly good year for hauling metals via truck, but there have been some challenges,” says Craig Brown, executive vice president of sales for Maverick Transportation LLC, Little Rock, Ark. While metals volumes generally have been fairly strong, they have varied greatly by product type. Products such as SBQ bar and aluminum have been in high demand due to high automotive production, while pipe and tube shipments have suffered from weakness in the energy sector. Imports also have been affected by recent trade case rulings on hot-rolled, cold-rolled and coated sheet. “We have had to adjust where our trucks are needed,” he says, predicting that metals volumes will continue to improve as the year goes on.

Other factors may contribute to the transportation sector’s volatility. Service centers could find themselves with more loads than trucks in 2017 and 2018 as new federal regulations take effect, especially those requiring the use of electronic logging devices. New rules limiting driver hours of service, if passed, and the ongoing shortage of qualified truck drivers, also could prove troublesome, sources say. Rail and barge are not likely to see such tightening in the foreseeable future, notes Starks at FTR.

Shifting supply and demand in the trucking sector also could prompt some jockeying between modes of transportation, as well as the amount that companies rely on their own truck fleets versus common carriers to transport metals. Many service centers have their own dedicated truck fleets, which they use to make short-run deliveries. How short depends on the individual company. Olympic Steel uses its own trucks to deliver as far as a 200-mile radius, which is just short enough for their drivers to get home every night. Many others use their own trucks for much shorter runs, within a radius of 50 miles or so.

“While owning their own fleet can provide companies with more flexibility, those that do also feel more of an impact from a soft market such as this one,” observes Dennis Wilmot, president and chief executive officer of Iron Horse Logistics Group, Aurora, Ohio.

In fact, Maverick’s Brown maintains, more companies are transitioning to common carriers rather than maintaining their own fleets. “Much of this is due to the driver shortage, but it is also because of the rising cost of new equipment. Many companies seem to feel it isn’t worth replacing their older trucks once their leases come due.”

Views vary on the severity of the driver shortage and how much it affects the availability of trucks. The problem has been masked by the lower volumes of freight and the influx of drivers who lost jobs in the energy sector. But that will likely change as the economy improves and energy prices rise, predict the experts. Even now, finding qualified drivers is harder than at any time since the Great Recession, says Brown at Maverick, and it will get even harder as new federal regulations take effect, including those creating a drug and alcohol clearinghouse. Already, about half of all applicants fail the required drug test, making it difficult to attract new talent and replace the many drivers who are over age 50 and looking ahead to retirement. It takes eight to nine weeks to train new drivers, and it’s not uncommon for some to go through the costly training process and then decide the trucking lifestyle is not a good fit.

The other problem is finding individuals who meet companies’ qualification standards. “I usually look to hire owner-operators,” says J. Scott Corden, president of Steel Express Logistics, Burr Ridge, Ill., “But they are getting fewer and fewer.” Most service centers strongly prefer to hire experienced drivers, but some are recruiting young drivers right out of trucking school and putting them through further intensive training of their own. Many companies, service centers and common carriers alike, are offering higher wages to retain current drivers and attract new ones, but that leads to higher transportation costs.

Driverless trucks could someday help solve the problem, and make the nation’s highways much safer, but the technology is still years away, says Wilmot at Iron Horse Logistics. Ford Motor Co. has called driverless technology “inevitable,” he notes.

Meanwhile, trucking is gaining ground on other modes of transportation. With today’s low diesel fuel price, Brown says, it’s now cheaper for companies to ship flatbed loads by truck than rail, in many cases. “Some companies are using trucks more, which also has the advantage of delivering their goods faster.”

Plummer, at Metal Strategies, sees this trend continuing, even as the price of oil rises above $50 per barrel. He predicts that trucking’s share of the metals market will gain about 2 percentage points over the next 10 years at roughly equal expense to both rail and barge.

In December 2017, when trucks are required to use electronic logging devices rather than paper logs to record drivers’ time behind the wheel, driver productivity could decline by at least 3-5 percent, Brown estimates. Currently, only about 20 percent of the ELDs are installed, but trucking companies are working diligently to upgrade their trucks, says ATA’s Costello. “They don’t want to be caught at the end of next year with too little capacity.”

Whether proposed driver hours of service restrictions will go into effect is still in limbo, Brown says. The industry is awaiting the results of a U.S. Department of Transportation study that will determine if drive time should be capped at 73 hours in any seven-day period or if it’s more effective to require at least two overnight rest periods in every 34 hours. The goal is to reduce accidents caused by driver fatigue. The unintended consequence will be the loss of driver productivity and a tighter supply of trucks, Brown says.

Meanwhile, shippers continue to enjoy low costs. Base trucking freight rates have been fairly flat, and lower fuel prices have led to lower fuel surcharges. “Surcharges have ticked up slightly in recent weeks with the rise in oil and therefore diesel prices,” Brown notes. Railroads have attempted to raise their base rates by 5-6 percent, says Wilmot, but have met a lot of resistance. Barge rates are down 20-30 percent.

Metal Strategies’ U.S. Bulk Freight Index—a weighted average of truck, rail and barge/ship costs—declined 3.5 percent for the year to date through April, on top of a 2.6 percent decline in 2015. Metal Strategies’ U.S. Flat Bed Truck Freight Rate Index (base rate plus fuel surcharge) was $1.94 per ton mile nationwide in May 2016, down 11.6 percent from the prior year. By region, trucking rates were highest in New England/Mid Atlantic at $3.01 per ton mile and lowest in the West Coast/Mountain region at $1.69 per ton mile. Averages for May for other areas were $2.05 in the Southeast, $2.21 in the Southwest and $2.27 in the Midwest. Metal Strategies’ U.S. Rail Freight Car Rate Index increased 1.6 percent through the first five months largely due to small increases in fuel surcharges.

Burns expects both metals volumes and freight rates on the various modes of transportation to see single-digit year-on-year declines in 2016. Volumes could rebound a bit next year, but spot prices will remain flat, he predicts. “With the intense focus on cost, it has been a buyer’s market for all modes of transportation,” he says, which is good news for service centers and other shippers.

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Thursday, December 14, 2017