SUPPLY CHAIN DIGEST: June 2021

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INDUSTRY NEWS

• Import contingency plans are in full swing as C-19 restrictions are put into place to stop the spread of C-19 at the south China ports of Yantian, Shekou and Nansha. The Yantian International Container Terminals in South China are creating disruptions that exceed the impact of the six-day Suez Canal blockage. With 25% of China-U.S. trade loading from Yantian, the C-19 outbreak on May 19th has greatly impacted loading with productivity at the port now being reported at 500 container throughput compared to the average volume of 30,000 per day.
• Swift bolts on capacity through UTXL acquisition. The acquisition of UTXL, a non-asset 3PL, gives Knight-Swift additional truck capacity beyond its own assets.
• In the rising cost of commodities, lumber has been singled out as retail costs have skyrocketed at the local hardware stores. The National Association of Home Builders reported lumber costs are adding an additional $36,000 to a new single-family home.
• Air cargo volume was up 41% from May of last year, however, cargo capacity is down 21% when compared to May of 2019. The air cargo capacity shortage is pushing rates higher, illustrated by the key lane of Hong Kong to the U.S. hitting $9.50 a kilogram in mid-May. This is an increase of 127% when compared to May 2019.
• FedEx will increase three surcharges on Express and Ground shipments beginning 6/21/21. Handling, residential delivery and a peak surcharge on Ground Economy will all be implemented for the summer due to congestion.

Freight Market Assessment June 2021

Freight Expense Drivers:

Inventory: inventories decreased by 92.88 billion dollars in Q1. Seasonal adjustment of the business inventories to sales ratio ended at 1.23 in March. This is unchanged from March of 2020, but a slight uptick from February 2021.

Capacity: tender rejections trending upward beginning in April. Truckload opportunities maintain ratio levels since state economies began opening in July of 2020. Class 8 truck sales are contracting since peaking in November 2020 at over 50,000 units sold. May’s unit orders were over 20,000 units.

1. Port Congestion: 22 container ships await entry in the LAX/ LGB ports. This is due to a backlog that has been ongoing since July 2020 and the ramp-up of Asian imports.
2.  Global container shortage: sea containers are not in the right place to meet the global demand due to the jagged opening of economies. Container rental fees and expenses to reposition empty containers have resulted in cost increases.
3. Rail Congestion: the port backlog as well as an influx of containers at each of the rail yards has resulted in congestion which has driven a chassis shortage for intermodal lanes from the rail yards to shippers. The result? Increased freight charges and a moratorium on small shippers that would normally ship via rail.
4. Driver Shortage: the driver shortage has been in existence for over 2 decades now. Today, driver pay and benefits have never been better. The number of owner-operators has never been higher. The same can also be said for other industries competing for labor. The challenge: highly competent and trained drivers to keep expenses such as claims and insurance lower. Driver pay now ranges from $55,000 to $90,000 per year, becoming a major driver in a carrier’s cost.

Fuel Cost: fuel continues to rise hitting $3.21, its highest level since 2018. Since 2015, the highest national average fuel cost for diesel has been $3.31.

Commodities: commodity shortages are driving increased prices which, in turn, apply pressure on the supply chain resulting in tighter capacity. Examples include semiconductors, and large ticket items such as appliances, electronics and automobiles. To meet manufacturing demands, expediting becomes a norm which impacts truckload and less than truckload capacity as shippers look for ways to move inbound raw materials and components to their plants.

Rockfarm One View

Where do we go from here?
Pressure will continue on freight rates with volatility within the market existing through this year. C-19 restrictions have been lifted in large part throughout the U.S. resulting in a further ramp-up in the economy. As we have seen with the global container shortage, imbalances in equipment and truck lanes will continue for the near term as shipping lanes attempt to gain some balance across regions. The carriers are challenged in keeping equipment balanced to keep efficiency in their network and routes.

Large shippers are going back to the market with annual RFPs to solidify rates in the new normal, versus maintaining the majority of their business on a spot market basis. As a result, we will see more consistency in rates as carriers balance contracted rates against rising expenses and lock in for the long haul. This will mean mid-size to large asset carriers will be buying work and looking to maintain that work through contracted rates, resulting in trucking capacity being taken out of the spot market. Rest assured, large shippers will be working hard to avoid rate fluctuations. What this leaves is fewer trucks available for small to mid-size shippers, creating an environment for higher costs due to the lack of available capacity. This is typically driven by bid placement on the open market where carriers will hold out accepting loads until the rate has reached its
peak price.

Inflation is real. It is not quite evident in the Consumer Price Index but will be soon as manufacturers get a handle on expenses and begin raising prices in line with increased expenses. Freight expense is one of the many expenses shippers are seeing, defining the expense and developing a communication plan to the customers about freight expense is critical. The top 3 factors for communication with customers are:

1. Domestic freight congestion and high shipment volume, leaving too few trucks for too many loads has resulted in an increase in spot market activity where shipment prices are bid higher
2. Carrier and truck expenses are rising, driver pay is up and fuel expense has increased 19% since January, this is being reflected in carrier rate increases
3. Inventories were depleted during the pandemic, the surge in new orders has created congestion at west coast ports and rail hubs in Chicago and Dallas prompting surcharges by ocean carriers and the railroads as our traditional shipment balance becomes imbalanced

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FOR MORE INFORMATION, PLEASE REACH OUT TO INFO@ROCKFARM.COM.

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By Brad Stewart

Co-Founder, CCO

Brad’s journey into logistics began as a Marine Officer and transitioned from the LTL docks to the non-asset side within the logistics service provider arena.  As a co-founder of Rockfarm, Brad drives our business development efforts and delivery of our promise. An Arizona native, Brad enjoys spending time outdoors in his home state with his wife and family.

“Our approach to the market allowed us an opportunity to push forward in 2008 and enable our mission, “lower the cost to serve” to stand as a cornerstone to our company today.”

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References

Brajkovic, Vesna (2021 April). Class 8 Production Dampened by Component Shortages truckinginfo.com
https://www.truckinginfo.com/10140635/class-8-production-dampened-by-componentshortages

Marine Traffic. (2021 June). www.marinetraffic.com Miller, Greg. (2021 April). No relief: Global container shortage likely to last until 2022
https://www.freightwaves.com/news/no-relief-global-container-shortage-likely-to-lastuntil-2022

Ashe, Ari. (2021 May). US drayage drivers quitting as rail ramp congestion crimps pay https://www.joc.com/trucking-logistics/drayage/drayage-divers-quitting-rail-rampcongestion-crimps-pay_20210519.html

Duffy, Kate. (2021 June). Pay for truckers is soaring – one said his salary shot up to $70,000 from $40,000. But it’s not enough to fill thousands of driver vacancies. https://www.businessinsider.com/truckers-pay-hike-salary-truck-driver-shortage-2021-6

Miller, Jen. (2021 May). Why lumber prices are spiking https://www.supplychaindive.com/news/lumber-demand-shortage-price-saw-mill-boardhousing-pandemic-labor/600876/

Bloomberg. (2021 May). Green Hydrogen Seen Fueling Heavy Trucks by 2030 https://www.supplychainbrain.com/articles/33159-green-hydrogen-seen-fueling-heavytrucks-by-2030

Leonard, Matt. (2021 June). Low capacity keeps airfreight rates high between Asia and US https://www.supplychaindive.com/news/air-cargo-freight-ocean-rates-clive-tac-may/601590/

Leonard, Matt. (2021 May). FedEx piles on peak surcharges with increases set for June https://www.supplychaindive.com/news/fedex-surcharges-ground-express-peak-parcel/600658/

Deign, Jason. (2021 June). So, What Exactly is Green Hydrogen? https://www.greentechmedia.com/articles/read/green-hydrogen-explained

Proship. (2021 June). Is Amazon Within Striking Distance of UPS, FedEx, and USPS to Become a National Parcel Carrier?
https://www.supplychain247.com/article/ is_amazon_within_striking_distance_of_ups_fedex_and_usps