JBF Transportation Bulletin – April 2019

JBF Transportation Bulletin
April 2019 | Commentary By Mike Mulqueen, JBF Consulting

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Table of Contents:

Summary

Shippers continue to benefit from a relative calm period as compared to the utter chaos that was 2018.  FTR’s Shipper Condition Index remains in neutral territory and both DAT and Freightos are reporting stable / slightly lower rates for trucking and ocean freight respectively.  Diesel prices have increased a bit MoM but are still within a relatively narrow range that has been maintained for the last 2 years.

In news this past month, Amazon, which spent nearly $28 billion in shipping last year, has announced that it will begin rolling out changes to enable prime subscribers to get product in 1 day.  This will have a huge impact on their fulfillment costs, with $800 million in expenses tied to this initiative expected this quarter alone. However, but it should also drive new prime subscriptions and increase e-commerce sales, which have started to grow more slowly in recent quarters.  

Additionally, the initiative will make all e-comm players take notice and come up with competitive offerings. The question is, can anyone do this profitably. Amazon has the benefit of subsidizing their e-commerce business with revenue with their high margin AWS offering, but offering 1 day delivery for all prime subscribers won’t be cheap.  

Finally, trade talks between the US and China continue in a rather tumultuous fashion.  The Trump administration has threated to increase the tariffs on $200 billion of goods from 10% to 25% by Friday, May 10th unless progress is made.  See below for an article on how Asian companies have been preparing for the potential change to the trade agreements in place as well as an interesting read on IMO 2020 and how shipping companies are preparing.  

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Price Trends

TL Spot Rates

Downward pressure on spot rates continues.  National dry van rates are down approximately 16% from last April.

 

 

 

 

 

 

 

 

Ocean TEU Rates

TEU has stabilized around $1500 on the East Asia/China trade lanes over the last 3 months.  While rates are 20% higher YoY, they are down nearly 40% from the fall, 2018 highs. 

TEU China To US West Coast

Source: Freightos

 
 
 
 
 
 

 

 

Diesel

 
 
 
 
 
 

 

 

 
 
 
 
 
 

 

 

 

 

 

 

 

FTR Shipper Condition Index

FTR Shipper Condition

Source: https://www.fleetowner.com/economics/ftr-s-shippers-conditions-index-february-stays-positive

At a near neutral reading of 0.6, FTR’s February Shippers Conditions Index (SCI) reflects a balanced freight market.  February is the fifth consecutive month that the SCI has been in positive territory with forecasts for the shipping environment to gradually improve through early Q4.  After that, conditions should settle into a near-neutral range with truck freight rates expected to be down, capacity additions likely decelerating and a relatively stable fuel cost outlook.  However, if recent increases in crude oil prices continue, that could raise shippers’ costs and negatively impact the SCI reading.
 
“The freight market remained relatively balanced in February despite the beginning of significant weather-related disruptions to freight flows,” Todd Tranausky, vice president of rail and intermodal at FTR, commented. “A stable truck market combined with resilience in the eastern rail networks have helped keep shippers conditions from deteriorating.”

Amazon Announces a Costly Move to One-Day Prime Shipping

AMZN will spend $800 million this quarter on warehouse and infrastructure improvements as it moves to free one-day shipping for Prime members

Amazon’s (NASDAQ:AMZN) cloud computing business may be going gangbusters, but the company’s e-commerce sales are slowing. Amazon Prime and its free two-day delivery are not the draw they once were, with rivals like Walmart (NYSE:WMT) expanding their online presence and leveraging vast physical store networks to negate AMZN’s delivery advantage.

So Amazon is ramping it up, telling investors it will spend big in the next quarter as it begins to roll out a program that will see Amazon Prime’s two-day free delivery cut to just a single day.

Amazon reported its earnings yesterday. While the company delivered Q1 profits that exceeded analyst expectations — always good for AMZN stock — there were signs of trouble in Amazon’s core e-commerce business. Unit sales saw just 10% growth during the quarter. Revenue growth of 17% marked the first time since 2015 that it has failed to reach the 20% mark. 

During its earnings call, AMZN announced it is tackling the problem head-on and spending big to do so. The plan is to reduce free Amazon Prime shipping times from the current two-day service to a single day. To do so, the company will be spending $800 million this quarter to improve its warehouses and delivery infrastructure. In fact, the first signs of this strategy emerged earlier this week, when it was reported the company began work on fulfillment centers across multiple states, resulting in thousands of employees facing the prospect of having to transfer to other Amazon facilities. 

There isn’t a timeline of when the switch to free one-day delivery for Prime members will begin, but Amazon says the rollout will start in the U.S. and North America, then go global.  As a result of this expenditure, AMZN is expecting lower profits in Q2. 

Amazon Prime Free Two-Day Shipping is No Longer the Lure it Once Was

When free two-day shipping was first introduced as a perk for Amazon Prime members in 2005, it was a big deal. The membership cost $79 for a year, free shipping was unheard of and having your order on your doorstep in just two days felt like the future.

Since then, Amazon’s brick and mortar competition has fought back. Retailers like Walmart and Target (NYSE:TGT) have greatly expanded their online presence. Walmart, in particular, has gone after everything from Amazon’s expansion into groceries to its domination of the eBook market as it battles to stay relevant. Walmart, Target and other retailers have also leveraged their nationwide network of physical stores to act as distribution centers to cut shipping times and costs, reducing Amazon’s advantage.

Today, an Amazon Prime membership costs $119, but that free two-day shipping perk no longer seems revolutionary — it’s a service level that consumers are increasingly expecting as the norm for online shopping.

Expected Benefits for AMZN

The move to one-day free shipping for Prime members is going to be costly for Amazon. Besides the investment in its own infrastructure, the company will need to pay more for shipping — a service that already cost AMZN $27.7 billion in 2018.

There was no word about whether there are plans to raise membership fees to help pay for the additional cost, but with a price increase in 2018 and pressure from increased competition, another Amazon Prime price hike seems unlikely.

The benefit to Amazon of moving to free one-day shipping is the potential to boost both unit sales and revenue for its core e-commerce business, getting them back to the growth levels investors are accustomed to seeing.

And with the move to free one-day shipping, AMZN may also see a hike in the 100+ million Amazon Prime memberships it currently counts worldwide — free two-day shipping may not be the draw it once was, but free one-day shipping is certain to have more people signing up. 

 

US / China Trade

https://www.hellenicshippingnews.com/trade-war-forcing-93-per-cent-of-chinese-companies-to-transform-supply-chains-survey-shows/

Trade war forcing 93 percent of Chinese companies to transform supply chains, survey shows

A vast majority of companies in China are being forced to reconsider their supply chain and production functions due to the trade war with the United States, a new survey has found.

In a poll conducted by the law firm Baker McKenzie, 93 percent of Chinese companies were considering making some change to their supply chains to mitigate the effects of trade tariffs.

Of these, 18 percent were considering a complete supply chain and production transformation, with 58 percent making major changes. A further 17 percent were making small changes in response to the trade war, with just 7 percent making no changes at all.

The survey helps put a figure on a trend which has been well-reported, that companies are reconsidering their Chinese manufacturing bases to avoid the tariffs placed on US$250 billion of Chinese exports by US President Donald Trump.

In some cases, this might mean the closure of a factory in China, with production transplanted to another country, often in Southeast Asia, with Cambodia, Indonesia, Malaysia and Vietnam proving popular destinations for new production facilities.

However, in other cases, it can involve a reallocation of production, where the manufacture of goods bound for the US moves to a country not affected by tariffs. The Chinese plant can then be redesignated to produce goods bound for countries that do not place tariffs on Chinese-made goods.

“Many companies are still looking at moving the location of specific manufacturing steps that affect the country of origin of an article. If possible, companies often try to do this within their existing global manufacturing footprint, but some are entering into relationships with new suppliers or are breaking ground on new facilities,” said Jon Cowley, senior international trade partner at Baker McKenzie in Hong Kong.

With the trade war now in its 11th month, experts said that many companies have gone beyond the point of considering whether to shift production and are now in the process of executing their plans.

“We have gone past the observation stage and are now putting things into action,” said Angelia Chew, the managing partner at the Singapore-based AC Trade Advisory.

“Everyone is realizing now that they have to be flexible in their supply chain and able to react to change. Because it could be India tomorrow [affected by tariffs], it could be China again, it could be another country.”

The survey also makes clear that the trend is not limited to companies of any given nationality. Baker McKenzie polled 600 multinational companies around Asia-Pacific, namely Australia, China, Hong Kong, India, Japan, Malaysia, and Singapore, of which 150 of the firms were based in China.

Region-wide, 82 percent of respondents are changing their supply chains to counter the trade war. Perhaps surprisingly, the biggest portion of respondents making changes, by nationality, were Japanese, with 94 percent of companies polled making changes to their operations.

An unnamed chief risk and compliance officer at a Japanese consumer goods company, who was interviewed by the researchers, said that “the trade war is causing delays in our supply chain that is affecting the quality of our products, and we are incurring additional losses in our logistics”.

Of the Hong Kong companies surveyed, 92 percent have been forced to consider changes, compared to 82 percent of Singaporean companies and 78 percent of Australian firms.

Chew, the Singapore-based consultant, said that the US-China trade war has forced a change in attitude towards supply chain issues, which were previously considered to be peripheral concerns.

“In the past, big companies looked at the supply chain and logistics functions as a cost, it was a lot simpler. Supply chain was about keeping costs down, considering where is the cheapest product to be made, but nowadays they are looking at it differently,” she said, adding that her firm has been fielding more inquiries from “second-tier” companies, which previously would not have considered more than one manufacturing base.

Foreign direct investment in Vietnam’s manufacturing sector, driven by electronics manufacturing, has risen to 11 percent a year over the past five years, and it has been a key driver of Vietnam’s export growth, according to data from Oxford Economics.

However, other analysts warned that while companies are certainly keen to avoid the impact of the US-China trade, their expectations should be managed as there is no country that can compete with China on manufacturing, when cost, infrastructure, quality, and service are all considered.

“Southeast Asia tends to be, on average, 10 years or more behind China in terms of infrastructure, logistics capacity and we also see these challenges extend to labor quality and manufacturing capacity,” said Maxfield Brown, a business intelligence manager in management consultancy Dezan Shira & Associates’ Ho Chi Minh City office.

‘The reality is that China is a diamond in the rough, the opportunities that became available in the last 20 years in China are unparalleled, it is unlikely that manufacturers outside China are going to be able to replicate that in the future.”

Ocean Shipping – IMO 2020 Update

IMO 2020 will be the boardroom elephant as deadline nears

IMO 2020 will dominate conversations in global shippers’ boardrooms and executive suites the rest of this year, and most likely part of next. Our discussions with industry savants at the Singapore Maritime Week gathering discern broad acceptance of the shift away from cheap, residual, heavy fuel oil despite the substantial costs. Panel discussions involving top executives reflect growing commitment to the push for fewer emissions, and concrete plans to implement required changes while preventing major disruption to seaborne commerce.

IMO 2020 rules will restrict the concentration of sulfur in ships’ fuel to just 0.5%. The shift will shake up shipping’s entire fuel-supply infrastructure, impacting trade, the oil markets, refineries and other transport-related industries.

IMO 2020 Mentions on Bloomberg Feed, Transcripts

Source: https://www.bloomberg.com/professional/blog/imo-2020-may-shippings-y2k-moment-industry-ups-readiness/

 

Fuel supply worries to fade as refiners take action

Fuel-supply worries linked to IMO 2020 are likely to diminish, in our view, as shippers and oil refiners push hard for low-sulfur fuel production and distribution ahead of the Jan. 1, 2020 deadline.

Accelerated testing of different compliant fuel blends by major shippers ahead of 4Q19 is another upbeat sign and should help minimize disruptions and promote a smooth transition, in our view.

Shell, Exxon Mobil, Chevron, BP and other oil majors have drawn up plans to ensure sufficient low-sulfur fuel supply at the world’s major shipping ports in recent weeks, easing shippers’ fears of stranded vessels due to shortages of compliant fuel.  Nearly 70% of respondents to a BI February survey believed shippers and refiners were ill-prepared for IMO 2020.

Oil Refiners to Accelerate IMO 2020 Fuel Supplies

Source: https://www.bloomberg.com/professional/blog/imo-2020-may-shippings-y2k-moment-industry-ups-readiness/

Compliant fuel price uncertainty to persist

Low-sulfur shipping fuel’s cost remains a stubborn unknown as IMO 2020 approaches, and our discussions with industry leaders suggest pricing clarity will remain elusive. Oil refiners have yet to put forth price frameworks for compliant shipping fuel despite reassurances about supply, and the lack of disclosure makes it difficult for shippers to accurately predict expenses. Shipping industry CEOs worry that refiners will attempt to capitalize on low-sulfur fuel’s price opacity in the short-term, a concern that’s shared across broader constituencies, in our view.

Maersk, CMA CGM, Cosco, Mitsui OSK, NYK, Evergreen, Hapag Lloyd, Frontline, DHT, Golden Ocean, Star Bulk, Euronav and other major shippers are exposed to higher fuel costs. Few owners have installed exhaust scrubbers, suggesting most will turn to low-sulfur fuel.

Shippers Wary of Low-Sulfur Fuel Price Opacity

Source: New York Mercantile Exchange

Scrubbers may lose favor as scrutiny intensifies

Exhaust scrubbers’ short payback periods and favorable economics have made them attractive investments for ship owners seeking compliance with IMO 2020 regulations. Yet, most industry reps we spoke with view scrubbers as a stopgap for shippers seeking to burn dirty fuel oil beyond Jan. 1, 2020. Longer-term, most expect scrubbers will fall out of favor as regulators step up scrutiny. Another gamble with scrubbers stems from the risk of a narrow price spread between low-sulfur and high-sulfur fuel — less than $200 a ton — which would diminish scrubbers’ economic benefits.

Scrubbers remove sulfur from ships’ exhaust while allowing them to keep burning high-sulfur fuel. Heavy fuel oil produces significantly higher emissions of sulfur oxides, nitrogen oxides and black carbon vs. alternatives.

Low Sulfur Fuel Projected Premium in BI Survey

Source: Bloomberg Intelligence Survey

Shippers may share cost burden with customers

Ship operators and customers should gird for a leap in operating costs once the switch to costly, low-sulfur fuel occurs in January 2020. Rising costs, struggling industry profitability, and strained balance sheets all suggest some of the added cost burdens from IMO 2020 will shift to customers, in our view. Costs could soar as high as $20 billion a year for global shipping, according to our estimates, with some variation among business segments. Ship owners will need better profitability and cash flow to manage higher fuel bills. Costs should normalize following a period of adjustment, yet will be significantly higher than prior to IMO 2020.  Carriers such as Maersk estimate their fuel bills will rise by more than $2 billion a year in 2020.

Expected Freight Increases, Shipped Commodities

Source: ITF/OECD, Bloomberg Intelligence Estimates

Diesel Prices Rise

https://www.thetrucker.com/onward-and-upward-diesel-prices-increase-again/

Onward and upward: Diesel prices increase again

The average price for a gallon of diesel nationwide rose 2.2 cents for the week ending April 29, currently standing at $3.169 per gallon, according to the U.S. Energy Information Administration (EIA). The average price for diesel risen every week but one over the past three months and is now higher than it was a year ago, albeit only by 1.2 cents.

This week’s price increase was felt in every region of the country, with the western third of the nation continuing to take a bigger hit than the rest of the country.

The Rocky Mountain region experienced the steepest gain in diesel prices, an even 4 cents, to end the week at $3.183 per gallon. Out on the West Coast, the overall price of diesel went up an average of 3.4 cents, to stand at $3.73 per gallon. California saw less of a gain than the rest of its pacific neighbors. The price there increased. 3.2 cents, lower than the rest of the West Coast or the Rocky Mountains, but still higher than anywhere else in the nation. The price of diesel per gallon in California is now $4.035, far and away the highest in the country.

The Gulf Coast, by comparison, continues to be the only region where diesel is still less than $3 per gallon, $2.939 to be exact, after an increase of 2.2 cents for the week.

The Midwest and Lower Atlantic regions continue to vie for the next-lowest prices in the nation, though both continue in the wrong direction. Diesel rose 1.6 cents in the Midwest, to finish at $3.058, while the Lower Atlantic climbed 2.4 cents, to $3.057.

Further up the East Coast, diesel rose in the New England region by 1.9 cents per gallon, to stand at $3.236, while the Central Atlantic region had the smallest increase in the nation this week, 1.5 cents. The price of a gallon there is now $3.385. That’s 6.4 cents above the price a year ago, which is more than any other region with the notable exception of California, where diesel is 20.1 cents more expensive than a year ago.

On Monday, Brent crude, the global benchmark, fell by 11 cents, or 0.2%, to settle at $72.04 a barrel. U.S.-based West Texas Intermediate crude rose 20 cents, or 0.3%, to settle at $63.50 a barrel.

 

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Upcoming Industry Events

 

May 5-7 Velocity 2019 MercuryGate user Conference Las Vegas, NV
May 5-10 Supply Chain Logistics Management Executive Seminar Lansing, MI
May 6-8 4th Annual D3 Retail Supply Chain Summit: New York New York, NY
May 6-8 Transplace 17th Annual Shipper Symposium Dallas, TX
May 6-8 Transparency19 Atlanta, GA
May 7-10 JDA Software: Focus 2019 Dallas, TX
May 7-9 SAP Sapphire Now + ASUG Annual Conference Orlando, FL
May 8-10 Customized Logistics & Delivery Assoc CLDA Annual Phoenix, AZ
May 13-16 Gartner Supply Chain Executive Conference 2019 Phoenix, AZ
May 20-23 Manhattan Associates: Momentum 2019 Phoenix, AZ
May 29-31 SCMA National Conference Montreal, CANADA
June 2-4 The Logistics & Supply Chain Forum Naples, FL
June 9-11 TMSA 2019 Logistics Marketing & Sales Leadership Conference Jacksonville, FL
June 10-12 3PL & Supply Chain Summit Atlanta, GA
June 17-21 LLamasoft: SummerCon 2019 Chicago, IL
June 25-27 SMC3: Jump Start 2019 White Sulphur Springs
June 25-28 International Retailer Conference (IRCE) RetailX Chicago, IL

 

 
 

JBF Consulting specializes in helping large shippers select, implement and manage their Transportation & Fleet Management systems so they can get more out of their investment. To contact JBF Consulting call 203-807-5231 or email: JBFInfo@jbf-consulting.com

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Disclaimer:  This newsletter is being provided to the reader as a general overview of current market conditions and contains information compiled by JBF Consulting from a variety of sources. 

This newsletter is provided solely for general informational purposes and is not intended to be, nor should it be construed by the reader as, specific advice or a solution tailored to a particular company or client. 

Before acting on any information, you should consider the appropriateness of the information provided to your company’s circumstances and it is recommended that you seek independent advice if you have questions specific to your own objectives.

JBF Consulting makes no representation or warranty as to the accuracy or completeness of the information contained herein and shall have no liability for any representations (expressed or implied) regarding information contained in, or omitted from, this newsletter.

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