Look Ahead To 2020 In Transportation: Are Haul Rates On The Rise?

We will soon close the book on 2019, which saw an oversupply of capacity and a trade war, leading to elevated freight volumes. What is the outlook for 2020? Knowing some key indicators will help you keep pace in the new year.

  • Impending regulations to impact capacity and the supply of fuel, resulting in price increases of up to 25%
  • Higher cost of domestic goods and less demand for trucks due to lower freight volumes
  • Election cycle results in continued volatility and economic uncertainty
  • Retail and consumer confidence are strong — retail sales to increase 4% in Q4 2019

One valuable way you can manage the uncertainty is to analyze your supply chain and logistics spend, which is expected to rise to $87 billion by 2022.

Cheers to Climbing Haul Rates
The tide is turning though, and it’s really good news. In a report to clients, financial services firm Morgan Stanley examined potential reasons truck supply could be constrained in 2020, causing climbing trucking rates.

Ravi Shanker, transportation equity analyst at Morgan Stanley, outlines certain catalysts in 2020 that could send haul rates back up to 2018 levels.

The Morgan Stanley report suggested that 2020 may be similar to 2018 with regard to truck capacity and rates. In 2018, the year of the original mandate to ELDs from paper logs to enforce stricter adherence to hours of service rules, some truck capacity exited the industry in lieu of compliance. The firm believes that the 2018 mandate resulted in a high-single-digit to low-double-digit hit to truck capacity, causing TL spot rates to spike 30%, with contract rates increasing 15-20%.

The firm highlights five factors that could tighten truck capacity.

  1. Data compliance and data flow with ELDs: The final electronic logging device (ELD) rule requires carriers to convert from automatic on-board recording devices (AOBRDs), an earlier version of ELDs that provided significantly less data and the capability to alter some data, to ELDs by Dec. 17, 2019. The mandate is intended to provide a safer work environment for drivers, making the flow of data easier and faster and ensuring data is not compromised.
  2. Insurance rates increase: Carriers have seen insurance premiums spike by 50% to more than double. Even well-capitalized, larger fleets have noted the pain from the increase in insurance rates.
  3. Drug and alcohol reporting: The Drug & Alcohol Clearinghouse, which aims to speed the reporting of drivers’ positive drug or alcohol tests, was cited as potentially drawing down capacity. Reporting of failed tests on the federal database is required starting Jan. 6, 2020.
  4. Fuel with lower sulfur content: The International Maritime Organization (IMO) 2020 regulation, which begins Jan. 1, 2020, is aimed at significantly reducing sulphur emissions by enacting a 0.5% sulfur restriction in 2020, which is down significantly from the existing 3.5% mandate. This will require the maritime industry to use fuels with lower sulphur content. The expectation is that this will create increased demand for refined products like diesel.
  5. California Assembly Bill 5: The California AB 5 rule is a headwind for truck capacity. The rule, which goes into effect Jan 1, 2020, is designed to limit the definition of independent contractors, requiring many of the independent owner-operators with whom carriers contract to haul loads to be reclassified as company employees.

Morgan Stanley conducted a survey of approximately 400 carriers, brokers, and shippers to produce its expectations around these events.

Here are some eye-opening results:

  • Of those surveyed, 65-70% expect the first three catalysts (ELDs, rising insurance costs, and the Drug & Alcohol Clearinghouse) to have at least a small impact on capacity in 2020.
  • Fifty-one percent of those polled expect an impact to capacity from IMO 2020, and 62% see an impact from the California AB 5 rule.

Shanker is currently modeling low-single-digit price increases for the TLs in 2020, closer to the low case scenario that calls for spot rates to improve 5-10% in the first half of 2020 with contract rates flat to slightly negative in the first half, but up 2-3% in the second half. The report noted that this scenario results in EPS estimates that are 7-10% higher than current consensus estimates.

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Matt Manero’s Take on the 2020 rate spike

Matt Manero’s 2019 Transportation Industry Analysis

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