BMO predicts tighter capacity, higher rates to come

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TORONTO, Ont. – Analysts with BMO Transportation Finance expect shippers
to hold the power over trucking rates through the middle of this year, but predict
that dropping carrier capacity could see rates push upward into 2021.

The talk of rising rates offers one of the few glimmers of hope for a Canadian trucking industry hammered by a coronavirus-related economic downturn and struggles that began to emerge before the virus took hold.

“A spike in spot rates during the first few weeks of March provides evidence of progress toward removing excess trucking industry capacity,” explains the 2020 BMO Transportation Finance update. “There is a plausible scenario that improving freight trends in the second half of the year and into 2021, coupled with ongoing reductions in carrier capacity, could lead to an upward trending rate environment that rivals the 2017-18 upcycle.”

At the moment, conditions are bleak.

Freight volumes are down, but could that lead to lower trucking capacity and higher rates? (Photo: iStock)

Freight losses within the weakest sectors of the Canadian economy now
outpace any gains in stronger sectors.

The total cost of over-the-road freight transportation hit a near-term
peak in February, thanks to factors like rotating rail blockades, and overall
truckload spot freight volumes in the first quarter of 2020 were up 25% over
those in the final quarter of 2019. But downturns in fuel surcharges and lower utilization
followed. Base rates are expected to fall further as the year progresses.

“Despite the strong
start, freight volumes are expected to subside significantly during the current
quarter as demand for consumer staples normalizes and the full brunt of
freight-heavy industry shutdowns (oil, manufacturing, construction) take hold,”
BMO says.

Still, the analysts expect re-opening businesses, coupled with fiscal and monetary policy support, will drive most freight categories higher in the third quarter of the year and beyond.

“The impact of Covid-19 will no doubt
accelerate the industry rebalancing process,” BMO adds, noting that available truck
capacity will continue to drop in the face of factors like mandated electronic
logging devices (ELDs), and equipment cannibalized for spare parts.

Not every sector is being hit equally
by the current economic downturn, either. Those that haul medical supplies,
groceries and consumer staples are on the downside of an initial peak but
remain robust, BMO says. In contrast, industrial manufacturing, construction,
and auto sectors have been hit particularly hard.

“The protein processing supply chain is an addition recent concern,” the analysts observe, in a nod to closures by meat processing plants.

Plunging crude values have had their own negative effect on those who haul steel or fracking sand, or remove waste.

Retail diesel prices – averaging 89
cents per liter in early May — have fallen to a level not seen since a
collapse in early 2016. That’s down 31% from an early January peak, and the
price is expected to remain near current low levels until the economy begins to
re-open.

Just take care not to celebrate those prices in mixed company.

“The negative implications of demand destruction
in energy far outweigh the benefits of lower diesel prices for carriers,” BMO says.

Credit: Source link

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