Article written by Jeff Berman
The most recent edition of the Coyote Curve by Coyote Logistics, a subsidiary of freight transportation and logistics services bellwether UPS, indicated that truckload market conditions remain challenged, due largely to COVID-19, with the caveat that they may have bottomed out in April.
Coyote Logistics defines the Coyote Curve as a proprietary forecasting model that helps shippers and carriers position themselves for success regardless of market conditions. And it measures three concurrent cycles-seasonal demand, annual procurement and more elusive market capacity–to help supply chain professionals identify recurring patterns that can lead to better informed supply chain and logistics decisions. The Coyote Curve made its debut in March 2018, and Coyote officials noted that it has “proven accurate in forecasting trucking freight rates and has correctly predicted the current deflationary market.
One of the main findings of Coyote’s data, for the first quarter, showed that the first quarter closed out at 5.8% annually inflationary, in terms of linehaul rates (excluding fuel) per mile in the spot truckload market year-over-year
“This means that spot rates were +5.8% higher that the first quarter of 2019,” said Chris Pickett, Coyote Chief Strategy Officer. “[That] can only happen if demand exceeds supply. The same logic applies to the Cass Linehaul index, which we use as a proxy for contract linehaul rates.”
The Coyote Curve also noted that some earlier predictions it had made proved to be accurate, including: the aforementioned inflationary spot truckload market; a short-term demand spike in March, as COVID-19 started to enter the U.S. population; and the widespread shelter-in-place policies shuttering large portions of the economy and more than offsetting growth in the movement of essential goods.
As for the second quarter, Coyote explained that it now expects a dramatic downturn in total truckload demand, given the unique nature of the recession, compounded by the recent collapse in diesel prices, which will “shock the market” enough to abruptly move spot rates into a deflationary state in the second quarter.
Pickett said that barring a material setback or COVID-19 driven retreat from efforts to re-open local, state, and national economies from here, April represents the worst of the worst in both industrial activity and spot market TL rates.
“As truckload demand continues to rise steadily with non-essential sectors re-activating, given the amount of supply that has likely already exited the market and the continued rebound in oil prices (and eventually diesel), we expect spot rates to rise sequentially through the end of the year,” he said. “If we get the U-shaped economic recovery that most economists are calling for, the rise in spot rates will be somewhat gradual where we tip inflationary by Q1 2021 on an annual basis. That will be followed by a spike much higher through 2021 as the typical truckload market cycle forces take over. If we get a stronger V-shaped recovery, we could see inflationary annual spot market conditions as early as the third quarter this year.”
Looking at the impact of the current recession on the truckload market, Coyote pointed to leading truckload market indicators, including consumption, which was up 0.4% in the first quarter, imports, which fell 5.8% in the first quarter, and industrial production, which was down 15.2% in April, with each trending lower and plummeting towards Great Recession levels, noted Coyote.
What’s more, it also pointed to lower annual Class 8 tractor order rates, in tandem with decreasing spot market rates, continued deflationary contract rates, as well as the COVID-19-fueled recession that made fleet investment less certain (or impossible). And it added that the current lack of incoming capacity will set up the next inflationary leg of the cycle, with shipper demand recovering and exacerbating the difference between spot and contact pricing.
When asked about the pace of recovery for truckload shippers in different sectors, Pickett said there is variation, depending on different things.
“The entire consumer Non-Durables sector has remained resilient given the essential nature of the products that fall into that category,” he said. “The consumption patterns that have played out so far with this particular recession – packaged foods and beverages, household cleaning products, medical and hygiene supplies, etc. I don’t think that stops once more of the economy is open and more folks are back at work earning paychecks. That said, there could certainly be some volatility depending on how long it ultimately takes to get more people back to work and as government stimulus programs expire. We are starting to see indications that the housing and home improvement sectors are bouncing back a lot quicker than most expected. The automotive industry is likely to take a much longer time to recover, especially if an increasing amount of the workforce adopts more permanently to the remote work-from-home model that we have all lived in the last couple of months. The services sector as a whole probably has the toughest time, barring a miracle on the vaccine front. Travel in general, airlines, restaurants, entertainment, and anything that depends on relatively dense clusters of people to drive revenue will have a very difficult road ahead, unless there is some meaningful innovation around the status quo. However, those businesses tend to be less TL-intensive.”
Looking at potential shipper conversion from truckload to intermodal, Mike Sinkovitz, SVP of Collaborative Transportation Management, Coyote, explained that lower overall costs and an abundance of capacity gives shippers the opportunity to re-evaluate their modal mix.
“Relative cost savings may no longer be as strong (or have flipped completely) from when they performed their pricing exercise,” he said. “Therefore, we encourage shippers to make decisions aligned with their long-term strategy. Their modal selection should be based on service, sustainability, and, of course, cost. The reality is that comps for intermodal may not be as strong right now as the truckload market has been so soft. Shippers may be able to shave transit time at comparable or lower costs by shifting to truckload. As truckload rates increase (as predicted by the Curve), the comparisons may swing back in intermodal’s favor. The value many shippers see in intermodal is the general rate stability…same for capacity in some markets.”