2020, Smooth Roads Ahead or Continued Uncertainty?
2019 was a year of market readjustment for the trucking industry. The industry experienced modest, albeit unsteady volume increases for 2019. The American Truck Association reported that volume, as measured via tonnage, increased by 3.3% in 2019 after a 6.7% increase in 2018. But the additional capacity that was added in 2018 and early 2019 caused downward pressure on both contract and spot rates. When factoring in wage increases from driver shortages in 2018 and increased insurance premiums from monumental verdicts, margins have been compressing for most of the industry.
2020 is starting off with relatively flat volumes. Predictions from the Federal Reserve show gross domestic product (GDP) growth slowing, dipping below 2%. The reefer and flatbed segment has been somewhat insulated from the over capacity as rates have maintained in the $2.50 range. The flatbed market continues to be supported by the construction and energy sectors. The reefer market, while starting the year strong due to cold weather, has begun to drop over the past few weeks as warmer temperatures have allowed shippers to go back to vans without the fear of product freezing.
2020 Brings the Potential of Change
2020 may potentially be a year to survive the storm of recent readjustments. One development impacting the industry is the Chinese New Year being extended due to the outbreak of the coronavirus. The three-week-long holidays were extended in some provinces to try to limit the spread of the virus.
Most are already well aware of the impact the Chinese New Year has on disrupting trade. This shut-down period also brings a lot of employee turnover in China, which requires pre-planning for merchants and factories to ensure products are shipped before the holiday. Compound that with the coronavirus outbreak and it’s hard to predict how much manufacturing will be impacted. There could be a shortage in goods from China or there may be a delay in production. For example, a delay in production of auto parts from China is impacting the auto industry. When production returns to normal, there will likely be a push to ship products as soon as possible. However, ports can only move so many containers a day and there are only so many trucks available. The question remains if the excess capacity in the market today will increase spot rates or simply meet demand.
The Phase 1 China Deal, which was signed on January 15, may give the industry a boost due to increased export activity at ports. While there are still tariffs in place on imports from China, the lost volume will have to be made up via imports from other countries or domestically. It’s also important to note that the deal contains a clause that each party could delay complying with their obligations in the event of a natural disaster. A case that could be made for the outbreak of the coronavirus.
Other factors that could play into 2020 include the mandate to switch from automatic on-board recording devices (AOBRD) to electronic logging devices (ELD), which had a deadline of December 16, 2019. While ELD’s have been required since 2018, those that were already using an AOBRD were allowed to continue usage of the device to record hours of service. However, by last December they were required to switch over to ELD’s, which display more data. If caught operating without an ELD or with an AOBRD, the truck is required to be placed out of service for 10 hours.
Finally, new for 2020 is the Drug and Alcohol Clearinghouse that went live on January 6th, 2020. In the first 30 days of operation, only 10% of drivers have registered and there have been more than 3,000 failed alcohol and drug tests. With the Clearinghouse in place, employers can’t hire drivers until they have registered and provided consent to search their records. Drivers that have record of a failed alcohol or drug test can’t get hired until they have completed a return to duty process. This system will prevent drivers that fail an alcohol or drug test from getting hired at another trucking company without completing the necessary rehabilitation.
Given the global uncertainty and new industry regulations, it's nearly impossible to predict what demand and supply will look like for 2020. Regardless, it’s important to focus on efficiency and asset utilization to remain successful. FNBO can help you with this evaluation to best position your organization for the rest of the year.
Learn more about FNBO's transportation financial solutions.
About the Author
Aaron Martens is a Director in the Commercial Banking Group for First National Bank. In this role, Aaron supports closely-held and family-owned businesses with comprehensive banking services. Aaron has been with the bank for over 15 years, with the majority of his experience in commercial banking. Aaron received a BSBA from the University of Nebraska Lincoln and an MBA from the University of Nebraska Omaha.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.