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US Transportation Market Update - October 31, 2022

We wanted to share the trends we’re hearing/seeing in the US freight markets, in case it helps to make better decisions for the next 12+ months on your approach to freight and cost management.

Many are already aware that the US is currently awash in consumer goods inventory and subsequent raw materials used in the production of those materials.  This is a direct result of the slow-down in consumer spending.

As such, both truck and container demand is also down, tipping the scales back to more capacity and thus, lower rates.  For the first time in recent years the cost of contracted (longer-term/volume-commitment) freight is higher than the spot market in both full truckload and container.

Most full truck metrics in the US are tipping the scales towards less-utilized capacity, which will lead to lower rates since transportation follows principles of supply & demand.

How can you take advantage of this market?  First and foremost is that if you have not started working with your transportation providers on improvements to freight cost and service, it’s a great time to start.  We would also guide that, if you are in charge of procuring, booking, and paying freight, we suggest you do not commit to volumes/pricing much longer than the next 6 months, and perhaps only with a portion of your freight portfolio.  It will be beneficial to let some of your freight rates float with the spot market.

Caveats: 1) Less Than Truckload (LTL), while also experiencing some loosening in capacity, is not quite as elastic as FTL at this time, and as such, the pricing decreases are not as remarkable.  2) Specialty truck markets (like dry bulk/tankers) may have different dynamics that do not necessarily support reductions in freight, although you should also be seeing corrections in Fuel Surcharge as (if) the ppb for oil continues to drop.

Container Congestion

The ports of New York/New Jersey are currently facing the worst congestion in the nation as tradelane volumes have shifted away from the US West Coast.  Additionally, inland ports (such as Chicago and Kansas City) are plagued with long container chassis turn-times, which is slowing the ability to remove and unload boxes and return empties to the rail yards.

A Note About Fuel Surcharge (FSC)

FSC trends generally follow the price of oil, which appears to be expected to be flat-to-down slightly through 2023.

However, as of last week, several news outlets started reporting diesel reserve shortages, especially along the East Coast of the US.  In concert with several other factors, such as low Mississippi water levels, another possible rail strike, and East Coast refineries already operating at 100% capacity, this means diesel prices will likely increase heading into winter.  CNBC estimated $0.015-0.20/gallon in the coming weeks (as of October 31), and could continue from there.

FSC methodologies differ between companies (if you have a large full-truck portfolio you may want to consider using your own FSC methodology) – but they are generally billed as a % of the total freight cost, and that % will depend on the region into which it is shipping.  For example, shipments to the Western US (especially CA) will have higher FSC % because fuel pricing is higher than in the East.

Additionally, FSC cannot be negotiated to remain flat.  You can negotiate flat line-haul rates (be cautious about doing this right now), but fuel will fluctuate with actual costs.  We recommend considering implementing your own FSC that is marked to the actual cost of fuel on a per-mile basis, rather than just a % of the line-haul freight (which is the standard approach from a transportation carrier).

Additionally, since FSCs generally update in-arrears, we may still enjoy a few months of slight corrections from peak FSCs between May-July of this year (maybe 5-10%).  Barring substantial impacts such as weather, geopolitical unrest, OPEC actions, etc., it still appears FSC levels will flatten-out over 2023.