Freight Transportation Bulletin June 2019

Transportation Bulletin Header June 2019
June 2019 | Commentary By Mike Mulqueen, JBF Consulting

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In This Issue:

Trucking Regulation
Trade War De-Escalation – Mexico and China
Freight Economic Conditions
Diesel Prices
Ocean Container Freight
Ocean Fuel Prices
Featured Article: The Three Big Challenges of Fleet Territory Planning
Industry Events


Conditions remain relatively benign for shippers. China and Mexican tariff pressures have been somewhat alleviated, at least for the short term. Additionally, freight rates remain depressed as last year’s capacity build-up is being met with a significant drop in shipper demand this year.  For those that have been around for a while, the boom/bust cycle in trucking is utterly predictable. 
A surge in demand causes trucking companies to increase capacity through enhanced driver compensation programs and the acquisition of new and expensive equipment.  The business case is developed based on rates that are temporarily high due to the shortage. As freight capacity increases, the market naturally goes back to an equilibrium, but not before purging unprofitable trucking companies from the available capacity of the market.  The next shock, often brought about by regulations or normal economic cycles, restarts the whole process.  
Today, while the pendulum has swung back to shippers, we are beginning to see new challenges on the horizon. Ocean container peak season General Rate Increases (GRIs) are expected to go into effect in July and the impact of IMO 2020, while not fully understood, will have a significant impact on fuel prices, both for trucking and for ocean freight. 
Publicly traded companies’ share prices are down significantly YoY and you have to wonder about the health of the vast number of small trucking companies and owner-operators that make up the backbone of trucking in the United States. The probability of Mexican tariffs or the extension of the Chinese tariffs have been reduced, but not eliminated and changes to trucking regulations are continually being debated.  
It is a dynamic world, and aside from the macro-economic factors mentioned above, businesses have internal initiatives in place (e.g New products, sales channels, geographies, sourcing strategies, etc.) that are reliant on efficient transport. 
It is incumbent upon you, as a leader within your organization to not just be a strong operator, but to guide your logistics organization based on what the future will likely look like. At JBF, we call this defining your Desired End State, which defines forward-looking requirements vs. simply replicating what is being done today. 
We recommend that shippers do this every few years as a great way to conceptualize not simply what is, but what can be.

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Trucking Regulation

Hours of service rule changes are due to be announced on July 31st.  The changes would relax some of the current hours of service (HOS) rules.  The FMCSA was seeking comments on four questions that provide insight into what the agency is considering.
The questions are:
Q: Should the agency expand the current 100 air-mile “short-haul” exemption from 12 hours on duty to 14 hours on duty, to be consistent with the workday rules for long-haul truck drivers?
Q: Is there adequate flexibility in the adverse driving exception that currently expands driving time by up to two hours?
Q: If the 30-minute rest break after eight hours of driving did not exist, would drivers obtain adequate rest breaks throughout a daily driving period to relieve fatigue?
Q: Do you have information that would support reinstating the option for splitting up the required 10-hour off-duty rest break for drivers operating trucks with sleeper-berth compartments?
Highway safety advocacy groups are trying to stop proposed changes to the existing rules.  They believe that changes will result in increased driver fatigue and therefore, more accidents. 
Additionally, a bill known as the Cullum Owings Large Truck Safe Operating Speed Act of 2019 has been introduced into the US Senate that seeks to require speed limiting devices on all new trucks over 26,000lbs. Advocacy groups note a rise in fatalities since 2009.  A deeper look at the data show that the trucking industry is much safer today than in the past. 
Research by the University of Arkansas highlights that a key driver in accidents is the differential in speeds between cars and trucks. The authors of the study note that a higher differential increases the number of car/truck interactions, which then increases the probability of accidents occurring. 

Here is a synopsis of the study:

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Trade War De-Escalation – Mexico and China

Just last month, the big news was the wholly unexpected announcement of tariffs on Mexican imports, which was driven by the perception by US authorities that Mexico was not doing enough to stem the flow of illegal immigrants into the US. 
The tariffs, which were slated to reach 25% by October, would have had a substantial impact on supply chains, especially in the automotive and manufacturing industries.  However, after Mexico agreed to use their National Guard on the border and crackdown on human trackers, the US backed off imposing the tariffs, at least for now.
An announcement of the US Department of State makes it clear that the tariffs are NOT off the table, so deteriorating conditions on the border could re-open the issue.

“Both parties also agree that, in the event the measures adopted do not have the expected results, they will take further actions. Therefore, the United States and Mexico will continue their discussions on the terms of additional understandings to address irregular migrant flows and asylum issues, to be completed and announced within 90 days, if necessary.”

Portion of US / Mexico Joint Declaration
Progress was also made with China in late June.  The G20 summit in Osaka yielded a revival of talks between the US and China which had broken down in May, and while the initial tariff on $250 billion of China imports remains in place, the administration’s threat to apply tariffs to the remaining ~$350 billion of imported goods from China is off the table, at least for now. 
However, as with Mexico, the underlying problems that led to tariffs in the first place have not been resolved, and the president has shown an eagerness to use trade as a mechanism to get what he wants. 

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Freight Economic Conditions

FTR’s SCI tracks freight demand, freight rates, capacity and fuel.  They use these metrics to calculate an index value. A reading of 0 is neutral, meaning that the market is balanced between shippers and carriers. A negative value indicates a carrier market and a positive value indicates a shipper’s market. 
In April, as freight demand picked up and spot rates rose slightly, the index ticked downward slightly to a reading of 1.9.  This value is solidly in neutral territory, and significantly better than last year’s catastrophic reading of -13. 
FTR has indicated that they expect the value to remain relatively neutral in the coming months, but as GDP growth slows – Now forecast to be approximately 2% in Q2 – and the impact of the Q1 inventory build becomes evident, freight demand could see further reductions, which will put further pressure on rates. 
Source: FTR Index
As noted above, spot rates ticked up ever so slightly reducing the spread between spot and contract rates however spot rates are down .43 / mile YoY and there remains over-capacity in the TL market as the economy cools and demand for freight capacity slows. 
Source:  DAT Trendlines
Adding to the struggles, carriers’ costs have risen significantly in the past year due to increases in driver wages, maintenance, insurance and assets acquired during last year’s boom.  The math worked for carriers when rates were at $2.50 – $3. 00 / mile, but not so much when they are at $1.90. 
This has led to financial stress on the trucking industry with large providers like New England Motor Freight and Falcon announcing bankruptcies this year, while nearly all the publicly traded trucking companies have seen significant declines in earnings and share prices. 

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Diesel Prices

Diesel continues to trade in a relatively narrow range, with the DoE price at $3.04, as of July 1, but there are warning signs on the horizon.  I have been bringing up the IMO 2020 regulatory mandate over the past few months, which requires steamship lines to reduce sulfur emissions from the current limit of 3.5% to 0.5% by January 2020. 
It should be noted that the impact of these regulations will not just be on the steamship lines and the beneficial cargo owners, but they will also impact diesel prices.  The move away from high sulfur bunker fuel to fuels that are more closely related to diesel, will impact refining capacity and demand. 
As there are so many variables that will ultimately drive the price of diesel, analysts have been leery to forecast the impact.  However, some initial estimates I have seen indicate that the retail price of diesel could rise 20-30% by January, and that assumes that the price of oil remains relatively flat.
Source:  US Energy Information Administration –

Relevant Article: Connecting All The Bones To Project What Will Happen When IMO2020 Hits The Market

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Ocean Container Freight

Ocean container rates edged up month over month and as of the end of June, averaged $1380 / TEU on China/East Asia to US West Coast trade lanes.  This remains significantly below the highs reached in November that exceeded $2500.  However, as the steamship lines look to impose peak-season GRIs, prices are forecast to rise this month $300-$400 this month. 

Freighto’s Chief Marketing Officer Eytan Buchman, CMO said in late June, “All signs are pointing to a big transpacific GRI coming up next week. Blank sailings and advance orders due to trade tariff threats both support an increase.” 


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Ocean Fuel Prices

IFO 380 and MGO prices remain relatively stable with the cost differential between the fuel types not changing significantly month over month.  MGO is the most likely initial compliance strategy that steamship lines will adopt as they replace non-compliant IFO 380, so we do expect IFO 380 prices to drop while MGO prices rise.  This have a significant impact on BAF fees toward the end of the year and moving forward into 2020.

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Feature Article: The Three Big Challenges of Fleet Territory Planning

Challenges of Fleet Territory Planning
Fleet territory planning or “Re-Routing” is a tactical modeling process used by shippers with pickup, delivery or service truck fleets.
The process is “optimally” performed seasonally or annually with the objective of creating a transportation blueprint that becomes the basis for daily route execution and driver assignment. 
Unfortunately, for reasons described below, most organizations do not perform this function as frequently nor as well as they should. Read the full article here.

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Transportation Industry Events

Aug 25-27McLeod Software: UC2019Denver, CO
Sep 9–12Material Handling & Logistics ConferencePark City, UT
Sep 15-18CSCMP EDGEAnaheim, CA
Sep 16-18ASCM (APICS) 2019Las Vegas, NV
Sep 16-17LogiChem US 2019Princeton, NJ
Sep 19-21FUEL 2019Chicago, IL
Sep 24-2621st Annual EMEA Supply Chain & Logistics SummitAntwerp, Belgium


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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. 

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