A perfect storm for ground shippers

by James Menzies

A perfect storm has been brewing in the Canadian trucking market that will see continued pricing pressure and capacity constraints on shippers. Freight conditions have been strong through 2021 and are expected to remain so in the near future, and trucking providers have been unable to add capacity due to labour issues and supply chain challenges that are limiting manufacturers’ abilities to supply new trucks.

As in the automotive industry, truck manufacturers have seen their build rates curtailed due to the global microchip shortage. Each Class 8 truck requires between 15 and 35 microchips. “If you can’t get enough semiconductors, you can’t build enough trucks,” reasons Don Ake, vice-president – commercial vehicles with industry forecaster FTR.

But supply shortages don’t end there. The manufacturers have also had to contend with shortages of tires, sheet metal, aluminum, wiring harnesses and other components.

All this comes while manufacturers try to ramp up production at their plants after Covid-related shutdowns.

“It’s much more difficult to turn any kind of manufacturing plant back on than it is to turn it off,” Steve Latin-Kasper, work truck association NTEA’s senior director – market data and research, said during a recent market update.

Comparing 2019 Class 8 demand and build rates to this year, Ake noted there’s about a 40,000-unit gap in production, or 26 percent, which highlights the impact of the supply chain issues manufacturers are facing this year.

“There is no clear progress being made to catch up,” he adds.

This has curtailed the traditional trucking company response to high demand and strong rates, which has been to buy more trucks. Build slots for 2021 are already full, and OEMs were hesitant to open 2022 order boards due to uncertainties related to component supplies and prices.

“Right now, we are doing more three- and six-month extensions than we ever have,” says Mike Willey, assistant general manager of leasing firm PacLease.

Record high rates

The industry’s inability to add capacity has seen trucking rates pushed to record highs on the U.S. spot market, with Canada’s spot market also experiencing rising rates and volumes. While the spot market only accounts for about 30 percent of freight hauled, it’s a leading indicator, with contract rates generally following about six months behind.

“Rates are close to record levels and are showing no clear signs of turning,” Avery Vise, FTR’s vice-president – trucking, said of the U.S. spot market.

The dry van and refrigerated segments are enjoying the strongest conditions, while flatbed has stabilized. Vise says FTR is projecting truck loadings, which have already returned to pre-pandemic levels, to grow about seven percent this year. Meanwhile, he adds, the industry will be challenged to increase the driver pool by seven percent, which means truck utilization is expected to remain high. It currently sits at nearly 100 percent, well above the 10-year average of 91 percent.

“We see a strong rate environment for quite a while,” says Vise. “There is not much good news for shippers based on our current forecast.”

Canadian carriers report conditions here are lagging the U.S., but that rate increases will be unavoidable.

“If this market keeps going the way it’s going, rate increases are nearly a given,” Murray Mullen, chairman and CEO of Mullen Group told analysts during a quarterly results conference call in July. “If you can’t hire more people you take the freight that pays more money and put your good people on that.”

He called in from site visits to newly acquired companies in Ontario, where he said warehouses were close to capacity.

“You can’t put more freight on our dock,” he added. “Now we’re working with our business units to say ok, what freight goes on our dock?”

Changing consumer trends

Much of the freight demand seen over the past year comes from changing consumer habits, accelerated by the pandemic. Carriers are transporting more – but smaller – packages and delivering boxes to homes rather than skids to storefronts.

Meanwhile, supply chain bottlenecks are disrupting the flow of freight. Just-in-time inventory management is changing to “just-in-case” management, Mullen said, which will require better planning and more warehousing.

South of the border, there has been a surge in trucking startups, but don’t expect it to add much capacity to the marketplace. Vise noted most are small operators who have struck out on their own to chase freight on the hot spot market, rather than additional capacity being brought on by larger carriers.

The U.S. trucking industry is down about 38,000 truck drivers since the pandemic began. Reasons range from generous unemployment benefits, to a new drug and alcohol clearinghouse launched in January that has sidelined some 60,000 drivers for drug test failures so far this year.

Labour shortage

In Canada, about 28,000 trucking jobs vanished during the first wave of the pandemic, but the recovery came quickly, with 74,800 trucking jobs added from May to August 2020. Subsequent waves didn’t see any drop in employment numbers and the most recent data from the fourth quarter of 2020 showed 15,995 vacant trucking jobs, with a vacancy rate of about five percent, nearly double the rate across all occupations within Canada.

“This indicates the occupation has already returned to similar shortages that were experienced before the pandemic,” Trucking HR Canada reported in a Labour Market Update. “The data is clear – the pressure and stress on trucking and logistics’ companies’ recruitment, training, and retention initiatives is not going away anytime soon. And even more importantly – this will put added pressure and stress on Canada’s economic recovery.”

The shortage of qualified drivers is another reason capacity relief isn’t likely to come anytime soon.

FTR compiles a Shippers Conditions Index, which assesses conditions based on metrics including freight demand, freight rates, fleet capacity, and fuel price. It has been near record-low readings so far this year.

Todd Tranausky, vice-president of rail and intermodal at FTR, says, “It remains a period of tough sledding for shippers as utilization and rates will remain difficult factors to offset in the near term. The fall peak season will add increasing pressure to supply chains and could create additional negative pressure in the index over that period.”

Mullen anticipates these same pressures are coming to the Canadian marketplace, where rate increases have lagged those in the U.S. Freight volumes certainly aren’t an issue in Canada. Loadlink Technologies reports spot market loads posted to its load board surged 53 percent year-over-year in June, with volumes strengthening near the end of the month.

Second quarter load volumes were up 10 percent from the previous quarter, marking the second highest quarterly volumes in history after Q2 2018. Fortunately for shippers, the truck-to-load ratio improved nine percent in June, to 2.68 trucks posted for every load.

Outlook improving

Still, the outlook for 2022 seems better for carriers than for shippers. That said, industry analyst ACT Research thinks the sector is leveling – albeit at a high level.

“Indicators we track for the economy, for freight, and for equipment utilization are about as good as we have ever seen, but recent data flows from the last six weeks or so suggest that the near continuous upward sweep of activity over the last few quarters may be beginning to level,” Kenny Vieth, ACT’s president and senior analyst, said in late July.

“To be clear: we are not forecasting a roller coaster descent from the top. Indeed, all you have to do is look at our forecast for the next two years – modest expansion, and basically sustained freight volumes at historically high levels. What we are saying is that the upward push of the heavy-duty market is in transition, from expansion to stability at high levels. The rate of change will get close to zero. Said another way, the market should bump along at a peak that over time should become a high plateau.”