July 2017

Truck Market to Get Tight Again

After two years of declining shipments eased some of the pressure on metals carriers, the prospect of increasing industrial demand combined with oncoming electronic logging device rule will push utilization rate near full capacity.

By Dan Markham, Senior Editor

Strain on the metals transportation network eased in 2016, but not for the right reasons. Lower levels of shipments from service centers to end use customers put some slack in the availability of trucks and drivers.

“Last year was the worst year since the recession,” says Jacque Morrow, who heads national accounts for PLS Logistics Services, Cranberry Township, Pa. “Driver turnover and retention have been an issue since I’ve been with PLS, but a lot of that was mitigated last year because of the lack of demand.”

That break is expected to be short-lived. Demand has already picked up in most markets in the first half of 2017. Morgan Stanley’s Load to Truck index shows a significant increase in demand from the first quarter of 2016 to the same period this year, with strength in the Southeast and Texas. Additionally, flatbed truck demand has outpaced the rest of the industry.

“Every month this year has seen a tremendous increase. Everybody’s looking to move metal,” says Scott Cordin, president of Steel Express Logistics, Burr Ridge, Ill.
Despite the stronger sentiment in the metals industry, overall shipments have been spotty thus far in 2017, reports the American Trucking Associations. The ATA’s seasonally adjusted For-Hire Truck Tonnage Index increased to 6.5 percent in May, but it followed three straight months of decline. The gains in May pushed the year-to-date index into positive territory at 0.9 percent.

“After three straight declines totaling 2.6 percent, truck tonnage snapped back in May,” says ATA Chief Economist Bob Costello. “One month does not make a trend, but the nice gain last month fits more with the anecdotal reports I’ve been hearing from fleets, at least more so than three straight months of decreases.”

But most metals carriers report increased activity level since the start of the year. “I’ve picked up a couple of accounts I’ve never done before,” says Cordin. “If I had a few more trucks, I’d be in business.”

That’s an ongoing concern. Currently, nationwide capacity utilization in the truck industry is close to 90 percent, with the expectation that it will creep up toward the 95 percent mark in the back half of the year. When it reaches 95 percent, the industry is said to be operating at full capacity utilization. “Effectively, when you look at the active equipment people out there saying ‘give me freight,’ that will be at 100 percent. They’ll be moving all the stuff they can,” says Eric Starks, chairman and CEO of FTR Associations, a Bloomington, Ind.-based transportation analysis firm.

As expected, the tighter capacity does give the carriers greater pricing power. PLS reports that spot market pricing for flatbeds was up 5 percent in April compared with the same month in 2016, while contract prices remained flat. The company projects the large asset-based carriers will shift some of their fleet to the spot market to take advantage of the price discrepancy.

Genuinely increasing capacity to meet a higher level of demand won’t be done overnight. Trucking companies have not been adding power units to their fleets, instead operating in replacement mode over the past few years.

And, of course, there’s the ever-present driver shortage looming over the industry. PLS says there are currently 48,000 driver openings, a number that’s projected to increase to an astounding 890,000 by 2025.

“We’ve been something of a Chicken Little with this driver shortage, saying it’s going to be debilitating. We haven’t had the incredibly strong economic backdrop that makes that real. But the demographics continue to be something that’s not debatable. We’re going to find ourselves short of people to drive trucks,” says Dan Van Alstine, president and CEO of Ruan Transportation Management Systems, Des Moines, Iowa.

The reasons are plentiful. The average age of a driver is close to 50, which means the industry is looking at a heavy wave of retirements on the horizon. U.S. unemployment has steadily fallen over the past eight years, tightening the opportunity to pull drivers from other industries while possibly losing some existing truckers to other jobs. New regulations enacted during the Obama administration have pushed some people from the market, either because of criminal records, drug test failures or poor driving histories making them more difficult to insure.

Additionally, “in the business of the metals vertical, it’s more acute than in many other parts of the transportation economy because of the physicality that is involved with transporting metals,” Van Alstine says.

Add to that, a new threat to the driver pool. In mid-December, all the nation’s trucks will be required to have electronic logging devices installed, eliminating paper logs altogether. While the move has been championed by the larger players in the industry, most of whom already have been using the technology, smaller fleets and owner-operators have been slower to adopt. Less than half of the trucks on the road are currently equipped with ELDs.

When the rule goes into effect, industry speculation suggests some percentage of the current fleet will opt to get out of the business rather than deal with the expense or perceived hassle of making the shift. “We think there’s going to be a 4 percent loss in capacity,” says Starks, who also believes there will be some degree of productivity loss as the late adopters to ELDs get up to speed with the technology. “What we don’t know is whether those people exit the system or get absorbed by the larger companies.”

The tough times of 2015-16 have already seen some shakeout among the carriers. Fleet failures increased significantly in the back half of the previous year. Some consolidation has also taken place, most notably with the merger of Swift Transportation and Knight Transportation. “You have some of the smaller fleets and drivers leaving the market, and the larger asset-based fleets are doing well, which is giving them more pricing power,” says Morrow.

The industry will continue its efforts to address the driver shortage, but thus far those attempts have been largely stymied. And the immediate future doesn’t look promising. “We have a couple of good truck driving schools in our technical colleges, and enrollment is significantly down. That’s a leading indicator,” says Susan Jaske, vice president and chief operating officer for Fairway Transport, Pewaukee, Wis.

Furthermore, if real wage growth, which hasn’t followed the decline in unemployment, occurs outside the trucking industry, it could further strain the sector’s ability to attract and retain talent, Starks says.

Van Alstine is not optimistic the shortage will be addressed until the industry is in true crisis. “We’re not going to see any movement on anyone’s part until we literally can’t move product. We’ll have a truck and a trailer, and a customer and an order, but we simply don’t have anyone to drive the truck.”

Given all that, one solution to the problem will have to come through productivity gains. And that’s where the distribution industry can play a role. Working with the carriers to understand their needs can go a long way to making sure a service center has a truck when it needs one.

“We have to work more collaboratively to find ways of making things safer, making processes cheaper. It’s going to take work from both the carrier and the shipper,” Van Alstine says. Most important for service centers in dealing with carriers is having the ability to get the truck into the facility rapidly, and loading and unloading as quickly as possible.

“It’s a tough deal for drivers. They have so many variables that they have no control over, traffic, cranes going down, showing up 10 minutes late and getting sent to the back of the line,” says Corbin. “The customers aren’t doing much to help.”

There are some positives for the industry. The strict Hours of Service regulations that have bedeviled the sector aren’t going away, but the industry participants are confident they won’t become more rigid. “They’ve been this black cloud hanging over the industry. Now we know the rules are permanent,” Van Alstine says.

Additionally, while power unit production has not been a priority, the industry has been adding trailers. Staging extra trailers at different points in the network is a relatively inexpensive way to increase productivity, Starks says.

The industry is also embracing technology. Besides the ELDs, which will improve productivity when the fleets make full use of them, subjects such as real-time visibility, load tracking, load boards and, the long-term dream, autonomous vehicles, are in the works. All of them, when fully implemented, can have dramatic effects on productivity.

In something of a surprise, the new presidential administration’s regulatory reform efforts have not targeted the trucking industry, and there’s little talk of tackling the subjects most significant to the players. “In the short term, we don’t think there’s going to be any meaningful impact (on the regulatory front,)” says Starks.

Moreover, the talk of a large infrastructure spend have been lacking in both specifics and momentum. The one concrete proposal thus far has called for a privatization of the air traffic control system, a change that would affect the movement of people, not freight.

A significant infrastructure build is perhaps the greatest gift the industry could be awarded. The American Trucking Associations estimates poor road conditions have added $50 billion in costs to the industry, and congestion has tacked on another $100 billion.

One regulatory reform, while not directed at the trucking industry, will benefit the sector nonetheless. Meeting EPA demands on emissions has added significant expenses to the cost of a new truck, and any slowing down of implementation will allow the industry to phase in new technology over time, when it becomes more affordable, Jaske says.

Starks says the industry is also keeping a sharp eye on what happens with NAFTA. The trade deal has been good for the trucking sector, and manufacturing in general, and tearing it up would be a major mistake. And while revisions to the agreement that make border passage easier for trucks, the more likely outcome is greater bottlenecks, not just in Mexico where it’s already bogged down, but even affecting the relatively smooth passage between the U.S. and Canada.

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