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Esmark Steel’s in-house trucking fleet works in conjunction with a network of dedicated carriers to deliver the company’s products. (Courtesy Esmark Steel Group)

Freight Expectations

Trucking market tightens, as increased freight demand gives way to record-high rates in 2018

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Most service centers consider logistics and transportation a key part of their business, but offering these services is becoming increasingly difficult in what analysts are describing as a carrier-friendly freight market. New trucking regulations, paired with record demand, has contributed to a tightening of capacity and soaring prices, putting budgets and deliveries in jeopardy.

“When we’re looking at the trucking market specifically, it is as tight as we have ever seen it before,” says Eric Starks, chairman and CEO of transportation research firm FTR, Bloomington, Ind. “If you’re a carrier, you’ve never seen it this good. If you’re a shipper, you’ve never seen it this bad. It’s definitely a very strained market.” 

Because the vast majority of metal products are transported by truck, particularly flatbed trucks, capacity issues in this sector can have major implications for metal distributors. Tight capacity not only increases the cost of moving metal but also makes it more difficult for service centers to ensure timely shipment of their products.

Freight demand and rates

Of the reasons why capacity has shrunk to record lows, none is more important than freight demand. Starks says 90 percent of the reason why capacity tightens or loosens up depends on tonnage. “It’s all about freight,” he says. “That is the biggest thing.”

Beginning late last year, freight demand began increasing at a fairly steady clip, and then kept on going. Truckstop.com’s weekly Market Demand Index, which measures relative truck demand in the spot market, is tracking well above last year, setting new record highs in January and June. “Traditionally, the market has been running 2 to 2.5 percent annual increases in truck freight,” Starks explains. “Well, we’re going to be growing upwards of 6 percent. That’s a pretty big increase.”

Similarly, active truck utilization has been at or near 100 percent for more than six months. “We remain at essentially full utilization of seated trucks and likely will for most of the rest of the year,” says Avery Vise, vice president of trucking research at FTR, who notes the current active truck utilization trend is expected to be the longest known run at full utilization.

With freight demand only expected to increase during the summer shipping season, there are other factors removing capacity from the market. Beginning in December, a federal mandate requiring most commercial truck drivers to use an electronic logging device to record hours of service went into effect and hard enforcement of the rule began April 1.

In response to the ELD rule, a number of carriers simply dropped out of the market. 

“We have seen that the ELD mandate has definitely pulled some capacity out of the marketplace,” says Starks. “As we move through the summer and into the fall, it’s going to have some adverse effects. Even if it’s not a huge impact overall, when you’re in a tight market like this anything that could remove capacity or change productivity in a negative way becomes a problem.”

Allan Welch, corporate transportation manager at Olympic Steel Inc., Bedford Heights, Ohio, agrees. He notes that because drivers can no longer “fudge their numbers” there’s been a noticeable loss in productivity. “We’re losing somewhere between 12 and 17 percent of efficiency with the new electronic logs,” he says. “It’s a big issue with everything else that’s going on.”

In this environment, metal distributors can expect both spot and contract trucking rates to continue to increase. The current spot market rate is nearly $2.40 per mile, a record high, according to Vise, who adds that strong demand through the remainder of 2018 will push all rates higher. 

“If we look at the outlook for all rates, we would expect year-over-year growth to moderate in spot rates with contract growth around 10-12 percent year to year and total rate growth slightly higher than that,” says Vise. “Rates are not going to go down at the end of the year; there’s just going to be a steady and somewhat less sharp increase for the rest of the year.”

Securing capacity

With shipping rates this high, it’s easy to understand why cost would be a major concern for metal distributors. However, Starks says service centers need to be thinking first and foremost about capacity. 

“Don’t think about cost right now,” he says. “Cost is almost irrelevant in some respects. Can you find capacity and get your stuff moved when you want it moved? That is a big deal right now. Nobody wants to overpay for anything, but the last thing you want to do is not meet your customer demand because you could not get the product there.” 

How service centers are able to ensure that capacity depends largely on their existing relationships with carriers and drivers.

Joel Mazur, vice chairman of Esmark Steel Group, Chicago Heights, Ill., says the current market is challenging, but it’s important for shippers to focus on the things they can control. “For any company right now, service centers in particular, it’s very important that you have a good relationship with a good carrier, somebody that’s going to be able to provide service for you,” he says. “We work very hard at that, and I’m sure that the industry is working very hard at that, particularly in light of the increased costs and increased challenges.”

For Olympic’s Welch, this means being the “shipper of choice,” not the shipper of last resort. Much of this can be accomplished at the loading dock, he says, noting that the ELD mandate has placed an emphasis on efficiency and maximizing drivers’ time.

“Whether a driver is coming in to deliver or they’re going out to make a delivery, we want them in and out in an hour or less,” says Welch. “And when they’re there, do the little things like have restrooms available and have donuts or coffee available to at least make them feel welcome. That’s very attractive to carriers.”

The consequences of not streamlining your distribution facility can be severe, according to Starks. “You have to make sure that you’re not holding a truck at a facility for an extended period of time because that’s an asset,” he says. “You’ll have a carrier fire you because you’re holding onto their driver and their equipment.”

Exactly how long the current conditions will hold is unknown, but experts agree the fundamentals of the freight market aren’t expected to improve much for shippers at least through 2018 and possibly into next year.

FTR’s Vise notes that active truck utilization is expected to dip slightly towards the end of the year, as a result of new truck orders and increased efficiency. “The very modest softening we will see by the end of the year will come not from weaker demand but from higher capacity through these increases and through ongoing supply chain adjustments to the current situation, such as productivity enhancements and better dock scheduling and management.”

Furthermore, overall economy activity, which Mazur says dictates freight demand and costs, isn’t expected to slow down. “If there’s a softening in the economy, all of a sudden there are trucks available,” he says. “But I think you’re going to see continued improvement in the economy. I don’t necessarily see a potential easing in 2018 and probably through 2019 as well. I just don’t see that happening.”

Starks agrees that economic growth will continue to place heavy demands on the freight market, adding he anticipates capacity issues to persist into next year. “I think through the middle of 2019 is going to be the pain point for a lot of people, and they’re still going to need to figure out how they secure that capacity,” he says.