Tight warehouse capacity, carriers pushing up rates, higher labor costs, unsustainable final-mile economics and upward pressure on fuel prices... A stew of elements is causing shippers to review their logistics budgets. While the pressure has eased somewhat since the beginning of the year, owing to diminished momentum in global trade flows, most observers expect costs to continue their upward trajectory this year.
Intermodal rates in the US set a new record in March, 6.1% higher than 12 months earlier, continuing a lengthy climb. March was the 30th consecutive month that they showed gains year-on-year.
Trucking rates have also kept climbing. The Cass Truckload Linehaul Index rose 4.8% in March, continuing an upward momentum that started in November 2017.
These developments reflect tight trucking capacity, increased driver remuneration in a tight labour market and rising fuel expenditures. In Mexico, regulatory changes have contributed to a double-digit increase in trucking costs. The government clipped hours of service and imposed more mandatory rest stops, which added to the capacity pressure on the nation’s roads.
Forwarders are also feeling mounting cost pressure. Bob Imbriani, executive vice-president international at Team Worldwide, said that employee recruitment and retention has become more costly.
“If automation can’t offset the higher costs, forwarders may have to look at increasing their fees,” he said.
Trucking, rail and labour costs have outpaced increases in warehouse pricing, according to commercial real estate giant CBRE, but this is cold comfort for warehousing clients. CBRE noted that last year vacancy rates in the US sank to levels not seen since 2000, sending up rents, and its analysts predict a continuation of these trends for 2019, seeing no indication of change in the market conditions.
Imbriani remarked that warehouse space can still be found, but it tends to be further away from ports and airports. Increasingly logistics providers look to areas 15 miles or more away, he said.
A report published in March by eyefortransport shows that 82.3% of logistics service providers surveyed expect the cost of moving goods across borders to climb, while only 5% think they will see lower costs this year.
Imbriani noted that upward pressure on rates has eased in the first quarter of this year, which reflects the slowdown in global trade.
The effect of this has probably been most pronounced in shipping rates out of Asia. By early April container spot rates from Asia to Northern Europe were down 36% from the start of the year.
However, blanked sailings have tightened marine capacity and shored up overall pricing. Rate portal Freightos reported that by mid-April container rates from China to the US were flat, but still significantly above the level recorded in April 2018.
Trans-Pacific carriers managed to push through a general rate increase at the beginning of the month. While market conditions and the uncertainty about global trade make another rate hike unlikely, the price of oil is raising questions. Diesel costs were fingered as a major factor in the rise of intermodal rates in March. Having languished at US$42 a barrel in late December, West Texas Intermediate crude oil surged to US$64 a barrel in the first three months of 2019.
The state of the global economy as well as a massive increase in US oil production suggest that oil prices are unlikely to keep up this momentum. Still, fuel is becoming another factor in supply chain cost planning, compared to the levels seen in 2018. Imbriani is concerned that airlines which dropped fuel surcharges for higher all-in rates a few years ago may bring back separate fuel surcharges.
In any case, airlines and vessel operators have shown determination to raise prices. Unlike four or five months ago, they are more willing to negotiate now though, Imbriani finds.
“Negotiating with airlines is back to where it was a few years ago. You can sit down and negotiate with them,” he said.
Ocean carriers have also shown flexibility on pricing, whereas trucking providers have been more likely to hold a firm line, he added.
This may reflect that US truckers have not had much time to digest their elevated costs brought about by the driver shortage and the electronic logging device mandate. With those involved in final-mile delivery of B2C traffic, the disparity between low rates and the associated cost may be creeping into pricing.
According to Business Insider Intelligence, last-mile delivery accounts for 53% of overall shipping cost, and those costs are rising with worsening traffic congestion. On the other hand, consumer expectations of free delivery within narrow time windows tie operators’ hands when it comes to raising charges to adequate levels.
In the long run this situation is unsustainable for parcel delivery firms. Management consulting firm Oliver Wyman recently warned that parcel delivery costs in Germany could double by 2028 as a result.
By Ian Putzger
Correspondent | Toronto