UPDATED: 2020 Industry Predictions and Regulatory Updates

UPDATED: 2020 Industry Predictions and Regulatory Updates

2020 is here; Sunset is preparing our customers with a few market updates going into what could be an unfavorable market for spot brokerage.

Class 8 Truck Orders Down YOY

When it comes to rates and truckload (TL) carrier capacity, 2019 has been a shipper’s market.  The year began with an over-capacity of trucks due to the carrier boom of 2018, a year that held two of the best quarters of revenue in the history of trucking.

Sunset closely follows the monthly number of class 8 truck orders as a predictor of upcoming market shifts (see chart below); October 2019 was at 22,100 units, the highest level since November 2018, but still far below the same month in 2018 (51% lower YOY).  October 2019 order activity was also the weakest performance for the month since 2016. October orders were the highest of 2019, up 79% over September.  

These numbers indicate a subdued beginning to the traditional start of the truck ordering season. The order level was boosted by bigger fleets placing large orders into 2020, but otherwise smaller orders were placed for the first quarter build. Cancellations are expected to remain elevated as OEM’s shake out excess 2019 orders from the backlog.

International Maritime Organization Imposes New Fuel Rules for Ocean Carriers

A new fuel requirement by the International Maritime Organization (IMO) will take effect on January 1, 2020, to reduce the ocean carriers Sulphur emissions and subsequent environmental impact.  Motor carriers could be hit by fuel price increases in 2020 for this reason, since marine operators to use the same grade of ultra-low sulfur diesel (ULSD) fuel as trucks.

Demand for diesel or diesel like products in the ULSD market will increase by approximately two million barrels a day to service the ocean liners.

With high-sulfur fuels currently around half the price of low-sulfur options, container lines are rushing vessels to shipyards to get scrubbers fitted ahead of new International Maritime Organization (IMO) rules that become mandatory at the start of 2020.

The rules state that unless some form of emission abatement technology such as scrubbers has been installed on vessels, the sulfur content of fuel oil burned by ships operating outside designated emission control areas must not exceed 0.5%, compared to 3.5% now.

According to Alphaliner, more than 10% of container ship capacity will be fitted with scrubbers by January, with more to follow over the next two years. The differential between high-sulfur fuel (HFO) and low-sulfur fuel (LSFO) prices is the main driver of scrubber demand.

However, the long line of container ships waiting to enter repair yards and their extended stays while there being fitted with scrubbers is costing carriers dearly in terms of vessel downtime, noted Alphaliner.

Average yard stays for vessels undergoing retrofits is now around 59 days, with 17% of vessels now out of action for more than 80 days. For larger ships, the cost of the downtime could be as much as $30,000 to $50,000 per day, although as FreightWaves has reported, the reduction in capacity is helping support spot freight rates.  However, those carriers that take the pain of lost revenues now are set to gain next year from lower operating costs.

With regards to OTR impact The IMO push toward low-sulfur fuels is expected to offer additional, unseasonal pressure onto diesel stocks and therefore increase its price premium. Each $1.00 per barrel increase in the premium for diesel results in about a 2.4¢ per gallon increase in the cost of diesel at the pump.

Other forecasts have commonly portrayed the IMO “bump” as increasing diesel crack spreads by $2.00 to $8.00 per barrel, which converts to about a 5-20¢ per gallon increase for diesel.

Diesel prices will not likely “soar” as an outcome of the IMO sulfur regulations. This perspective is supported by a well-supplied global oil market and the slowdown in diesel demand because of sluggish economic growth across many economies.  Low-sulfur fuel cracks will likely increase above their seasonal trends, but ultimately the diesel price ceiling will remain lower than the high prices experienced in 2018.

Sunset’s ocean and OTR customers should prepare for potential increased fuel costs, more than likely coming in the form of fuel surcharges through 2020 or until contracts are renewed.  The amount of the fuel surcharge will vary based on the trade lane, size of vessel, and transit routes.

Source:  FreightWaves

China Tariff Rollback

The USTR has announced that the Section 301 tariffs on goods from China that were scheduled to be effective on Dec 15th will not go forward. Phase One of the deal between the U.S. and China has been reached as announced by President Trump.

Additionally, the 15% that took effect on September 1st (list 4A) will be reduced to 7.5%. A date has not been announced as to when the reduction will be effective. Negotiations for the next phase of the deal will begin immediately.

Please refer to the USTR link for more information: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/december/united-states-and-china-reach

An extension for up to 12 months of the second set of exclusions from the Section 301 additional tariff imposed on List 1 goods from China is under consideration by the Office of the U.S. Trade Representative. Comments may be submitted between Jan. 15 and Feb. 15.

List 1 comprises 818 eight-digit HTSUS numbers that have been subject to an additional 25 percent tariff since July 6, 2018. The second set of exclusions from this tariff for List 1 goods was issued in March 2019 and is set to expire March 25, 2020. USTR is now considering a possible extension of these exclusions and will evaluate each on a case-by-case basis.

Related Sunset Content: Tariffs are here.

EU Tariffs Could Increase to 100%

​The USTR announced that tariffs on certain goods imported from the European Union could be increased to as much as 100 percent under a plan currently under consideration by the Trump administration. Some of the goods impacted are aircraft and aircraft parts, agricultural products, handbags, tools, books and paper, textiles and apparel, carpets and rugs, clocks, bicycle parts, knives, and others.  USTR is requesting comments on the impact of small and medium sized businesses and consumers.  Comments on the possible changes are due by January 13th.  

FMCSA Drug and Alcohol Clearinghouse Implementation

Other major legislation that could have an impact on truck capacity is the FMCSA’s CDL Drug and Alcohol Clearinghouse. After January 6, 2020, fleets will be required to query the database when making new hires and once a year for existing drivers.

The CDL Drug and Alcohol Clearinghouse will go live on Jan. 6, 2020. The database will show motor carriers any CDL drivers that have previously failed federal drug and alcohol testing.

Driver applicants must consent to a carrier doing a check in the clearinghouse. Both the motor carrier and driver will need to have accounts set up in advance. Registration for carriers and drivers will be available within the next few weeks, he said, at clearinghouse.fmcsa.dot.gov.

As part of the job application process for drivers, motor carriers should ask drivers if they have set up their account in the clearinghouse. A motor carrier cannot legally hire a driver that does not have an account, he said.

There is no cost to drivers to register for the clearinghouse, but motor carriers will be charged $1.25 for each query. They can buy queries in group packages.

Motor carriers will need to continue to verify three years of previous employment history on drivers, but three years from now this requirement can be completed by using the Clearinghouse, he said.

Source:  Trimble Transportation & Logistics Outbound Transportation News & Info newsletter

UPDATED PREDICTIONS from FreightWaves:
The clearinghouse, to be administered by the Federal Motor Carrier Safety Administration (FMCSA), will close a loophole that currently allows drivers who are fired for failing a drug test to get hired by another trucking company by lying about failing the test. Driver consent records will be retained in the database for three years, which means it will take at least that long to fully populate the system. Once that happens, the industry could see an even bigger shakeout.

USMCA Trade Deal Imminent

The US House of Representatives is set to approve the USMCA trade pact signed by Donald Trump with Canada and Mexico to revamp NAFTA, clearing the biggest obstacle on the road to ratification and lifting some uncertainty over the future of North American trade.  The vote anticipated to occur Thursday, December 19, in the Democrat-controlled House is expected to show resounding support for the pact, marking an unusual display of bipartisan comity on trade at a time of fierce political divisions in Washington, including over this week’s impeachment of the US president in the lower chamber of Congress. 

The likely passage of USMCA will be greeted with relief across corporate America, where businesses reliant on integrated supply chains stretching across the continent have been worried that President Trump might seek to withdraw the US from NAFTA altogether if Capitol Hill rejected the deal. 

Nancy Pelosi, the Democratic House speaker, had spent months negotiating with the Trump administration, including Robert Lighthizer, the US trade representative, over changes to the deal designed to ramp up the enforcement of labor standards in Mexico and limit protections for drug companies. The two sides finally reached a deal last week, a few days before President Trump moved to ease trade tensions with China by striking a limited truce, including a rollback in some existing tariffs. 

The revisions to the pact secured by Ms. Pelosi ensured that the AFL-CIO, the largest US trade union group, is supporting the agreement. This marks the first time the organization has backed a US trade deal in nearly two decades and opened the door for many Democratic lawmakers to embrace it.

Source:  Financial Times; https://www.ft.com/content/286160d4-21d4-11ea-b8a1-584213ee7b2b

2020 LTL Forecast

Several LTLs are set to report updates over the next few days. Following a round of private company channel checks, we anticipate these reports could highlight a deceleration in tonnage trends in Q1. We believe this is largely due to continued weakness in US industrial activity. We note that the Institute of Supply Management’s PMI reading has been sub-50 for three consecutive months, indicating month over month contraction in the US industrial economy. While tonnage trends remain under pressure, yields remain trim and carriers are continuing to realize y/y increases, albeit at more modest levels than earlier this year.

So how does Sunset plan to remain competitive in the marketplace?  With our technology and flexibility.

On the horizon for 2020 is the ability to utilize API for rate quoting.  Currently Sunset uses API to fetch images and provide status updates, but not rate quote.  As carriers continue to invest in technology (the LTL industry has now gone all-in on dimensionalizers.  If you don’t know what those are, click HERE).  We don’t have up-to-date numbers, but national carriers like Roadrunner Freight and YRC told us in Q3 that close to 30% of their terminals contained this technology and forefront carriers Fedex and Old Dominion have stated over 60%, including every major breakbulk facility.  As carriers get more creative on their ability to fill space on their truck, we must also get creative on how to maintain competitive pricing for that space.  The two most talked about items, from carriers to us, in 2019 was: density based pricing and dynamic rating.  Let’s briefly talk about each:

Density based pricing:  Carriers like ABF Freight, UPS Freight, and Southeastern Freight have made a major push to partner with 3PLs who can calculate cubic feet and pounds per cubic foot through their TMS.  While the NMFTA considers both density and stowability into their classification system, their “three times a year update” to commodities is far too slow.  Think about your TV today.  How light and fragile is it?  Now think about your TV five years ago.  Or ten years ago.  These carriers are willing to quote you on a real-time calculation of your freight.  Unfortunately, the ability to do this is currently only available via API. 

Dynamic LTL pricing:  Think spot board for LTL; several carriers have mentioned developing a pricing structure that changes daily, based on their current imbalances in their network.  For instance, Amazon opened up a new fulfillment center in Portland, OR a few months ago.  Any Amazon approved carrier had ten times more equipment in the PNW then they regularly do.  Dynamic pricing would have shown pricing OUT of that area to be drastically cost effective.  Contractual pricing, generally unchanged for a 12-month period, would not.  This model is paramount for us as a 3PL to remain competitive in the transactional arena.  These pricing programs are 3PL independent meaning it doesn’t matter if you ship 200 bills a day or 2,000 bills a day.  It’s first come, first serve. 

In conclusion, customers must accept that as the LTL industry becomes more automated, the opportunity for deals or free rides will disappear. As carriers have put a focus on efficiency of their space allocation, so must shippers focus on streamlining their packaging, and improving the density of their shipments. There is plenty of room for improvement here.  If shippers do their part by packaging goods as efficiently as possible, there’s no reason why the shift to dimensionalizing couldn’t be a win for all parties involved.  We remain committed to providing you every conceivable pricing structure available to benefit you and your customer.  We will continue to represent our core values in the marketplace. 

Source:  [1] https://www.cnn.com/2019/12/03/business/amazon-cyber-monday-sales-2019/index.html