Logistics News

2019 Rate Outlook: Pressure Builds

In 2019, the world economy will enter a third straight year of broad-based growth, but many economists feel that a combination of rising interest rates and ongoing trade protectionism will continue to create unexpected turbulence—and lead to even higher freight rates. How likely is this to derail the…

The global economy started 2018 with strong, synchronized growth, but the momentum faded as the year progressed and growth trends diverged. Notably, the economies of the Eurozone, the United Kingdom, Japan and China began to weaken. In contrast, the U.S. economy accelerated, thanks to fiscal stimulus.

According to Nariman Behravesh, chief economist at IHS Markit, growth in the United States will remain “above trend,” while other key economies will experience further deceleration. As a result, he predicts that global growth will edge down from 3.2% in 2018 to 3.0% in 2019—and will keep eroding over the next few years.

“One major risk in the coming year is the sharp drop-off in world trade growth, which fell from a pace of above 5% at the beginning of 2018 to nearly zero at the end,” says Behravesh. “The risk of an escalation in trade conflicts remains elevated. If such an escalation were to occur, a contraction in world trade could slow the world economy even more. At the same time, the sell-off in equity and commodity markets, on top of the gradual removal of accommodation by some central banks, means that financial conditions worldwide are tightening.”

“Energy markets have never looked more uncertain, and
uncertainty is the mother of volatility. Our industry is facing
a number of critical unknowns.”
— Derik Andreoli, Mercator International

Combined with heightened political uncertainty in many parts of the world, these risks point to the increased vulnerability of the global economy to further shocks and the greater probability of a recession in the next few years. However, IHS Markit analysts note that chance of recession in 2019 is still relatively low.

Logistics managers may face mixed blessings on the domestic front, based on estimates about sustainable growth in the labor force and productivity this year. IHS Markit assesses the potential growth in the U.S. economy to be around 2.0%. In 2018, U.S. growth was a well above trend at 2.9%, compared with only 2.2% in 2017.

“The acceleration was almost entirely due to a large dose of fiscal stimulus with tax cuts and spending increases put in place at the beginning of the year,” says Behravesh. “The impact of this stimulus will still be felt in 2019, but with diminishing potency as the year progresses.”

Consequently, IHS Markit expects growth of 2.6% this year, which is less than in 2018, but still above trend. They believe that, by 2020, the effects of stimulus will have fully dissipated, ushering in a new level of maturation. Economists add that over the next year, there are likely to be countervailing pressures leading to a plateau.

“On the downside, housing has been a disappointment, the dollar has been rising, credit conditions are tightening, and higher tariffs could still hurt growth,” adds Behravesh. “On the upside, interest rates are still low, and fiscal stimulus is still aiding expansion. For the balance of 2019, U.S. economic fundamentals remain fairly solid.”

Fueling fears

Considerably less solid, however, is the energy outlook, says Derik Andreoli, Ph.D.c, director of economic research and forecasting at Mercator International and the Oil and Fuel columnist for Logistics Management. “Energy markets have never looked more uncertain,” he says, “and uncertainty is the mother of volatility. Our industry is facing a number of critical unknowns.”

Chief among them, says Andreoli, is on the supply side of the equation. Shippers are eager to learn the extent of threats made by OPEC and Russia (OPEC+) to follow through on recent agreements to cut oil production by 1.2 million barrels per day. “We don’t know yet if shale producers alone will be able to lift production at a rate that’s commensurate with rising global demand,” he adds.

On the oil demand side of the equation, the question remains how long the developing world—which has accumulated massive amounts of debt denominated by the U.S. dollar—will respond to rising U.S. interest rates and a potentially steep increase in the value of the dollar.

“As oil is traded in U.S. dollars, rising interest rates will erode the purchasing power of other countries, which should suppress global oil demand growth somewhat, but not enough to ease oil price pressures,” says Andreoli. In short, oil production cuts should push prices up over the first half of 2019. And like last year, this cost should rise from around $50 per barrel in January to around $70 per barrel sometime in the first quarter.

“Over the second quarter, oil prices should continue to rise as domestic shale oil producers struggle to meet the forecasting pressures put on logistics managers charged with balancing all modes,” adds Andreoli. “Demand for all refined products will increase in price, too.”

Trucking troubles

Rising fuel costs are only one of many challenges facing logistics managers reliant on motor carriers in 2019. While this transport sector remains robust, increasing driver wages and insurance costs are eroding profits. Furthermore, note analysts, costs associated with labor, maintenance, equipment, licensing and compliance have increased steadily for several years.

Truckers are charging higher fees for shipping services, but much of the increase is going to cover rising driver wages, which leaves many companies still struggling to make sufficient profit. David Ross, transportation equities analyst for Stifel Financial Corp., forecasts truckload (TL) rates to rise from 5% to 7%, with less-than-truckload (LTL) rates rising 3% to 4%. He does not find this particularly alarming, however.

“Just as everyone wants to fill up their car at the gas station with the cheapest price, when the price triples, they still have to fill up,” says Ross. “It’s the same for trucking, in our view. Shippers won’t pay a penny more than they have to for truckload capacity, but they’ll pay whatever they have to.”

Brian Hodgson, vice president of transportation strategy at the SaaS provider and consultancy Descartes, says he’s already seeing higher rates on both TL and LTL with a lot more volatility based on lane.

“With the current capacity crunch, shippers are trading off cost pressure to secure capacity and develop stronger relationships, trying to minimize the reliance on the spot market,” says Hodgson. “A number of shippers are moving to or expanding their dedicated fleets. This provides much more predictability to capacity, which is critical for the customer experience.”

Rail ramping up

Trucking’s capacity constraints have been part of the good news for rail and intermodal, says Frank Harder, a principal with the transportation consultancy Tioga Group. “Railroads made a lot of money in 2018, as we predicted in last year’s forecast,” he says. “The same holds true for 2019, as coal transport had a significant uptick and steel manufacturing strengthened.”

Harder also believes that innovations pioneered by CSX in creating precision scheduling railroad (PSR) techniques will continue to transform the pricing and rate landscape. “We see that Union Pacific and Norfolk Southern are also copying PSR, which focuses a railroad to improve service and maintain fluidity,” he says. “This is done in part by shedding marginal operations and facilities, and is much easier to do in a growing market.”

In summary, Harder feels railroads are confident that they can grow both their volumes and their operating ratios, thereby charging shippers more aggressively than motor carriers can manage. “This is not a good year to get special or lowball deals from a railroad…for any commodity group,” he concludes.

Air cargo upswing

Carrier pricing for air cargo shipments is also expected to remain on a steep trajectory, says Chuck Clowdis, managing director of the consultancy Trans-Logistics Group, Inc.

“We saw cargo capacity beginning to exceed demand in December of 2018, but we believe that was only a temporary setback,” says Clowdis. “The explosive growth of on-line shopping alone will keep the air cargo sector very healthy in 2019.” He adds that air carriers are starting to use Big Data research in creative ways to increase cargo yields and introduce more velocity into shipper’s supply chains.

Alexandre de Juniac, director general and CEO of The International Air Transport Association (IATA), shares this cautious optimism. The IATA forecasts the global airline industry net profit to be $35.5 billion in 2019, slightly ahead of the $32.3 billion net profit in 2018.

“We had expected that rising costs would weaken profitability in 2019,” says de Juniac. “However, the sharp fall in oil prices and solid GDP growth projections have provided a buffer.” All regions are expected to report profits in 2019. Carriers in North America continue to lead on financial performance, accounting for nearly half of the industry’s total profits.

“Financial performance is expected to improve compared to 2018 in all regions except for Europe, where improvement has been delayed by the high degree of fuel hedging,” says de Juniac.

Ocean carrier concerns

Fuel prices are at the heart of concerns being voiced by ocean cargo industry analysts. Philip Damas, head of Drewry Supply Chain Advisors in London, says that he’s advising shippers to look at their bunker formula very closely in the second half of 2019, before the regulatory changes announced by the International Maritime Organization (IMO) take hold.

“We hear that on some routes, ocean carriers are no longer prepared to sign contracts with fixed all-in rates that include bunkers,” says Damas. Over the second half of 2019, refineries and ship owners will begin preparing for the final phase in compliance with the IMO 2020 sulfur regulations. These rules stipulate that as of January 1, 2020, all bunker fuel consumed on ships will need to have a sulfur content that is no greater than 0.5%.

“The global cost of this on the ocean carrier industry will exceed $10 billion, and all the shippers we work with are wondering how they will deal with it,” says Damas. Drewry’s IMO cost impact calculator service offers some replies to the question about the likely financial impact to shippers. However, he adds that other revolving factors are keeping any rate forecasts a little blurry at this point.

“Changes to contract terms, fuel surcharge structures, a potential slowing down of vessels, the demolition of many fuel-inefficient vessels and the possibility of an escalation of the U.S.-China trade war are worrisome,” say Damas.

Without a long-term agreement between the two global powers this year, shippers will have to confront a massive disruption in global ocean cargo supply chains and vessel deployments. “This would likely be followed by soft contract rates when most new annual service contracts are negotiated in March and April,” adds Damas.

Mixed parcel picture

Last year at this time Jerry Hempstead, president of parcel express firm Hempstead Consulting, told logistics managers to expect carriers to impose more than one rate increase in 2018. That prophecy held true, he reminds us, but it does not shed much light on what to expect in 2019.

“It’s going to be a challenge for managers to plan a budget this year,” says Hempstead. “But we can look at the recent carrier announcements of their 2019 general rate increases (GRIs) to see how much pain your P&L might experience.”

According to Hempstead, carriers “speak in smoke signals” and use “averages” that comprise the published diminished parcel rates. “Their averages are not a reflection of their actual experience because shippers don’t tender an equal number of shipments for each service type, each weight and each zone,” he says. “And no two players are alike.”

For example, DHL-USA announced a substantial increase in its fuel surcharge table last September. They had been significantly below the numbers charged by UPS for imports and exports. “Fuel prices have remained stable, so there’s no excuse for hiking up surcharges,” Hempstead explains.

According to Hempstead, carriers are also adding to the menu of items that carry a fuel surcharge. For example, fuel surcharges will now apply to UPS shipments that have additional handling, over maximum limits, signature required and adult signature required accessorials.

“As you know, all of this is negotiable,” says Hempstead, who cautions shippers that the magnitude of the GRI is negotiable each year. “The minimum charges are negotiable, the accessorial charges—including fuel—are negotiable, and the timing for these talks is generally up to the shippers. In most cases, even if you signed a carrier agreement a month ago, you’re free to negotiate a new deal,” he concludes.


Register for the Rate Outlook Webcast here. 


Article Topics
Drewry   IHS Markit   Rate Forecast   All topics


Comments
You must be logged in to post a comment. Login.

About the Author
Patrick Burnson, Executive Editor
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at [email protected]
 
Latest Logistics News
Trucking Ambassadors of Safety
As Landstar’s “ambassadors of safety,” Landstar Safety Officers (LSOs) are the representatives from each independent agency at the forefront of Landstar’s Mutual Understanding of Safety Together…

2019 Transportation Management Systems Market Update
The transportation management systems market is growing right along with the number of challenges that shippers face in today’s hectic freight transportation environment.

Transportation & Supply Chain Predictions for 2019
For 2019, we believe the U.S. transportation industry and supply chain professionals will place more emphasis on digitization within the supply chain to help them address future complex challenges.

Holiday Season Heightens Challenges of Online Returns for Retail Supply Chains
Although online retailers are coming to terms with the high return volume that comes with online shopping, reducing the cost associated with those returns remains a top priority.


 

24|7 Pro Team

The 24|7 Team is your direct pipeline to solutions for your business challenges. It's your opportunity to have supply chain and logistics experts look at your specific challenges and needs, and give you free, no-obligation advice, solutions, and information.

The 24|7 Team will simplify the task of creating a database of likely partners, building your knowledge base, and preparing your Request for Proposal list.

1
  Choose a topic for your RFP

Transportation RFP/RFI

The Transportation RFP is your direct pipeline to solutions for your transportation challenges. It's your opportunity to have logistics experts look at your specific transportation challenges and needs, and give you free, no-obligation advice, solutions, and information specific to your request.

Choosing the perfect software or system can be an indomitable challenge. Using this transportation/TMS RFP will simplify the task of creating a database of likely partners, building your knowledge base, and preparing your Request for Proposal list.

Warehouse/DC Management RFP/RFI

The Warehouse Management Systems (WMS) RFP is your direct pipeline to solutions for your WMS challenges. It's your opportunity to have logistics experts look at your specific WMS challenges and needs, and give you free, no-obligation advice, solutions, and information specific to your request.

Choosing the perfect WMS solution can be an indomitable challenge. Using this WMS RFP will simplify the task of creating a database of likely partners, building your knowledge base, and preparing your WMS Request for Proposal list.

Supply Chain RFP/RFI

The Supply Chain RFP is your opportunity to have logistics experts look at your specific challenges and needs, and receive free, no-obligation advice, solutions, and information. It simplifies finding a pool of likely partners, building your knowledge base, and preparing your Request for Proposal list. The companies in the Logistics Planner have agreed to respond to your request for in-depth information and follow-up, and your request is totally confidential.

Software/Technology RFP/RFI

The Software/Technology is your direct pipeline to solutions for your logistics information technology challenges. It's your opportunity to have logistics experts look at your specific technology challenges and needs, and give you free, no-obligation advice, solutions, and information specific to your request. Whether it's WMS, TMS, Mobile or Cloud, our pros can help.

The companies listed below have agreed to respond to your request for in-depth information and follow-up. Your request is totally confidential.

Executive Education RFI

The Logistics and Supply Chain Education RFI can help you identify the schools, coursework, continuing education, distance learning and certification opportunities available from leading logistics educational institutions.

Upgrade and improve your logistics and supply chain skillsets. Whatever route you choose—advanced degree, executive education, certification or distance learning—the time and money you invest in your education today can pay off in continued career success tomorrow. Contact leading universities and professional institutions for the information you need to prepare for the future.

Third Party Logistics RFP/RFI

This 3PL Request for Proposal (RFP)/Request for Information (RFI) can help you find the 3PL and 4PL providers that can meet your specific 3PL service challenges and needs. The 3PL companies below will provide free, no-obligation third-party logistics advice, solutions, and information.

Ask your 3PL questions, you'll get answers. Simply complete the information, and detail your 3PL challenges. Then, check off the third-party logistics companies that you want to review your request.

1. Choose an RFI topic.
2. Enter your contact information and challenge.
3. Select companies and optional categories.
4. Submit.


2

Your Information



Your Challenge, Problem or Request *

3

Select Transportation Companies

  • Select All

  • 3Gtms
  • BluJay Solutions
  • CSX Trans. Intermodal
  • Kuebix
  • Landstar
  • Legacy Supply Chain Svs.
  • One Network
  • Pitt Ohio
  • Purolator
  • Quintiq
  • SEKO Logistics
  • SMC3


Select Relevent Categories

  • Air Freight
  • Intermodal
  • Motor Freight
  • Ocean Freight
  • Rail Freight
  • TMS

Select Warehouse/DC Management Companies

  • Select All

  • 3PL Central
  • Apex Supply Chain Tech.
  • Honeywell Intelligrated
  • Kuebix
  • Legacy Supply Chain Svs.
  • Swisslog
  • Westfalia Technologies
  • Zebra Technologies


Select Relevent Categories

  • Auto ID & Data Capture
  • Automation
  • Conveyors & Sortation
  • Lift Trucks
  • Packaging & Labeling
  • Pallets & Containers
  • Shelving & Racking
  • WMS

Select Supply Chain Companies

  • Select All

  • 3Gtms
  • 3PL Central
  • Amber Road
  • Apex Supply Chain Tech.
  • APICS
  • BluJay Solutions
  • CSX Trans. Intermodal
  • Frontier Business
  • Kuebix
  • Landstar
  • Legacy Supply Chain Svs.
  • Logility
  • One Network
  • Purolator
  • Quintiq
  • SMC3
  • Synchrono
  • TAKE Supply Chain
  • Westfalia Technologies
  • Zebra Technologies


Select Relevent Categories

  • Global Trade
  • Inventory Management
  • Risk Management
  • Sustainability

Select Software/Technology Companies

  • Select All

  • 3GTMS
  • 3PL Central
  • Apex Supply Chain Tech.
  • BluJay Solutions
  • Honeywell Intelligrated
  • Frontier Business
  • Kuebix
  • Logility
  • One Network
  • Quintiq
  • SMC3
  • Swisslog Logistics
  • Synchrono
  • TAKE Supply Chain
  • Zebra Technologies


Select Relevent Categories

  • ERP
  • Sales & Operations
  • Sourcing/Procurement
  • Optimization
  • Transportation Mgmt
  • Warehouse Mgmt

Select Executive Education Choices

  • Select All

  • Graduate Courses
  • Online/Distance
  • Executive Education
  • Certifications
  • Undergraduate
  • Seminars
  • Associations
  • Conferences
  • Tradeshows


Select Third Party Logistics Companies

  • Select All

  • 3PL Central
  • Landstar
  • Legacy Supply Chain Svs.
  • Purolator
  • SEKO Logistics
  • Westfalia Technologies


4
 

24|7 Company Profiles