COVID-19 logistics market situation report: North American road freight

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The condition of road freight in North America is less confused than, say in Europe, but still fraught and unpredictable. The US and Canada have both avoided much of the supply-side crunch experienced in Europe, China and some other parts of the world. Demand is more similar, although less spikey. Initial indications are that prices have risen strongly on major routes but the demand situation may be brittle.

Supply-side

The present indications suggest that capacity is leaving the market as smaller freight fleets suffer stress and shrink their operations. The short-term likelihood is that this segment of the market will begin to see business failures. This may be affected by extraordinary fiscal policy, such as offers of short-term liquidity from government, however, in the near-term, the effect on the market is to moderate any collapse in prices.

One key aspect of the supply-side in North America is the superior functioning of the borders between Canada, the US and Mexico. Canada and the US in particular have agreed to expedite ‘essential’ truck movements. Mexico is a slightly different situation as truck crossings are limited to a narrow geographical strip. Never-the-less we are not seeing the congestion seen in other parts of the world.

Similarly, North American ports are not suffering from a lack of landside transport. They may be suffering from many other issues as a result of fluctuating demand and the congestion that results but truck transport in and out of the ports is available. However, the condition of sea freight is known to be having a severe impact on ‘drayage’ at the ports although the speed of development and the wild swings in demand have confused even the truck companies themselves. It is strongly suspected that volumes at the West Coast ports are down by 50% month-on-month for March.

A further problem for demand-side in trucking is the shortage of return-trips or backhaul. If these are not available certain truck providers will withdraw from the market. This is believed to be reducing capacity and driving-up prices on certain routes.

Demand

Demand was already softening heading into March and the effect of the COVID-19 has been severe but not catastrophic. Demand softened in the third week of March and fell precipitously in the fourth week. However, the level of disruption in the economy has had the effect of reducing the operational efficiency of many road freight services, with extensive delays at pick-up and drop-off points and sudden shortages of services or equipment. This, combined with what might be called a sense of panic in certain sectors has driven up freight rates on many major routes. This may not be sustainable in even the short-term with the balance between supply and demand suggesting a sharp fall in prices. What may be sustaining the increase is a degree of market dysfunction as road freight providers struggling to shift capacity out of market segments that are falling and into those that have growing demand.

The level of dysfunction in the market has been less in the US than elsewhere, however, the deformation of demand has still been significant. To analyse by vertical sector:

  • Automotive demand is down by less than say in China or Europe, however, sales and production are down by around one third. This is not yet at catastrophic levels for the large and medium truck operations that feed inbound logistics into assembly plants however it will trigger substantial reductions in truck activity. It should be noted that the logistics service providers in the inbound market segment tend to be larger and more reliant on sub-contracted trucking services than some other market segments. In contrast, finished vehicle transport may be very vulnerable. Those with lower margins but with higher levels of assets they may be the first to feel real pain.
  • Other industrial sectors: This is a mixed area, with a few areas seeing significant demand but others, especially in areas of mechanical or aeronautical engineering, seeing markedly softening demand. Although not unimportant other sectors are more important for the general road freight sector although the chemical sector has its own dedicated capability that may be feeling a degree of pain. It should be noted that this sector is fundamental to areas such as agriculture so there will be a limit to the collapse here.
  • Hardware/clothing. This sector has been particularly hard hit with a near collapse in demand for some segments such as furniture. This is probably one of the most significant drivers downwards for the trucking sector in North America. Note, many parts of this sector have extensive exposure to globalised supply chains. The question is, will this sector bounce-back and if it does how will it do it? If this is the case the truck sector as a whole will recover.
  • Grocery. Possibly one of the most remarkable sectors, it now has been running at a very high level, with demand up possibly by 50%. This must be absorbing considerable capacity in the road freight market including from other areas such as automotive. Specialist areas, such as temperature-controlled which had been experiencing above market average growth, may be very tight. By the beginning of April there were some suggestions that demand was falling, however, there are limitations on how far this can fall. The ‘deformation’ of demand pattern may actually add to demand.
  • Energy. Here it is not the COVID-19 that is the problem but the oil price fall. A recovery here would be good for the trucking market overall.
  • Shipping Containers. Driven by the instability of the sector at a global level over the past month, port-related trucking has lurched from famine-to-feast and now back to famine. The ability of providers to survive may well depend on their access to short-term liquidity.
  • Construction. This has fallen heavily. Unclear when demand here might recover although it could be the beneficiary of Federal spending projects in the medium-term.
  • Although ‘Express’ is supposed to be built around air transport, truck capacity is very important and the two leading US providers are leading truck providers with huge in-house fleets. They have been at the point of the market deformation and bifurcation. Almost certainly their full-truckload and less-than-truckload businesses will be suffering, however, their ‘home delivery’, last mile and other express services are booming. The probability is that they can adapt some their underutilised trucking resources to support the express and home delivery operations. It may be that FedEx and UPS come out of this crisis stronger than they went into it.

Prospects

The general feeling – and it is really no more than that – is that even over a period of a few months the road freight sector will begin to consolidate. This is both through a combination of bankruptcy and merger & acquisition. In part this may be an adaption to the new ‘equilibrium’ in the market. However, caution should be shown over this opinion. Equilibrium in the road freight market is driven in great part by the low entry barriers in road freight. It will be interesting to see if any new players evolve a new business model that circumvents this aspect of the market.

What may happen is that the market changes its structure. This may be the key to the emergence of new business structures. It is easy to suspect that these may be driven by the increase in e-retail activity.

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Source: Transport Intelligence, April 09, 2020

Author: Thomas Cullen

 

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