The impact of hurricanes Harvey, Irma, and Nate, the pending electronic logging device (ELD) mandate, and an uptick in overall freight demand has “unquestionably” given trucking fleets the upper hand in 2018 freight rate negotiations, according to a report from analyst Jason Seidl, managing director and senior research analyst at Wall Street firm Cowen and Co.
He said private fleets and third-party logistics (3PL) firms are “as bullish as we’ve ever heard,” with rate increases possibly reaching as high as 15%.
John Larkin – managing director and head of transportation capital markets research for Stifel Capital Markets – noted that in recent weeks truckload volumes and spot rates have remained strong, and “contract rates began to move in the positive direction for the first time in a year and a half,” though spot rates backed off slightly last week.
He explained that shortly after the end of second quarter 2017 earnings period ended, the “story” for motor carriers “became more constructive” in terms of freight rate negotiations.
“Motor carriers began to offer shippers a proposition: ‘We can lock you into a 2% to 3% rate increase now or you can deal with rates when the market further tightens once the ELD mandate is implemented in late 2017 and early 2018,’” Larkin said. “That seemed to be generating some modest level of positive traction.”
He added that hurricanes Harvey and Irma, and later on from Nate, acted as a “catalyst” for the freight market to transition from one of “modestly positive” freight rate increased to one that’s “strongly positive,” as the Federal Emergency Management Agency (FEMA) among others “injected a lot of incremental demand into an already tightening marketplace as emergency supplies were rushed into storm stricken areas.”
Larkin noted, too, that “the prospect for rebuilding damaged structures will create a longer than normal tail on this storm-driven incremental demand. Add in the normal retail seasonal peak, the e-commerce surge at the end of the year, and the implementation of the ELD mandate on December 18 and we have a recipe for a prolonged period of elevated demand, strong spot rates, and sizable mid- to high-single digit contract price hikes.”
“This is one of the highest periods of turbulence and volatility in supply [that] we’ve ever experienced, and we don’t think it will abate anytime soon,” the company said in its letter. “We predict our cost environment will be fluid and more responsive to the supply of drivers and capacity, as well as the additional constraints anticipated by the upcoming ELD mandate. With the expected impact of these conditions, we advise budgeting for transportation cost increases that may reach 10% or more.”
That upward momentum in freight rates is also pushing up demand for new trucks, according to Stifel.
“Throughout 2017, truck equipment orders have been better than expected with the purchasing coming primarily from small/mid-sized fleet and vocational customers,” noted Michael Baudendistel, vice president at Stifel’s transportation & logistics research group.
“The question in our minds is whether large fleets will order equipment in large quantities this fall; we expect they will, given optimism surrounding [the impact of] ELDs, freight volume trends, and especially freight rates,” he said. “We believe October-December Class 8 orders in North America will average more than 30,000 units per month, up 60% from the same period last year and 30% above the 10-year average level.”
Baudendistel added that Stifel is predicting a 5% to 10% hike on contract freight rates next year. Combined with truck capacity exiting the market due to the impending ELD mandate, along with increasing replacement demand, the firm is raising its forecast for Class 8 production up 12% next year to 280,000 units.
Where the medium-duty truck segment is concerned, growth will occur but at a slower rate. “Production generally shows less volatility than heavy duty trucks, with greater diversification across industries and purchases by local governments and utilities,” Baudendistel explained.
With housing, construction, and industrial markets all healthy, Stifel is forecasting growth of 4% in North American Class 5-7 production to 257,000 units next year, on top of the 5% growth expected for 2017.
Trailer production may decline only modestly from the current high levels, he noted, in part because trailer production never declined steeply from prior peak levels like Class 8 equipment did in previous years.
Stifel expects trailer and tractor production to come closer to in line, since the average age of trailers in the field has now returned to “normal levels.” The firm is forecasting a slight decline of 4% in U.S. trailer production to 280,000 units next year, but noted “we view that as a still-favorable operating environment for the [trailer] OEMs.”