Trucking Industry in Recession
The trucking industry is facing a challenging business environment that may be worse than the Great Financial Crisis. Per-mile rates have been declining due to increased supply, higher maintenance costs, and other operational difficulties. The trucking industry is known for its volatility and low barriers to entry, leading to a capacity surge when carrier rates rise. The current downturn is attributed to declining demand for goods and the industry's cyclical nature. Rates have dropped to as low as $1.49 per mile, compared to $3.01 per mile during the peak of the boom in 2021. Inflation and rising operating costs further impact truckers' earnings, while a shortage of mechanics adds to the challenges. Despite the increase in the number of trucks on the road, the ability to command high rates has diminished, with tender rejection rates falling significantly. Until there is a significant reduction in capacity, the industry may continue to struggle, “This is a situation where it’s going to take a while to get rid of all the excess capacity,” Craig Fuller, FreightWaves CEO, says. “We have not yet seen a situation where large or mid-size carriers are going out en masse. I don’t think we can call a bottom ... until we start to see a real washout of very large companies.”
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New BNSF Service
BNSF Railway has announced plans to expand its service from the port of Houston to Alliance, Texas, and Denver starting next month. The new intermodal service options will leverage the capabilities and technology advancements at BNSF's Alliance, Texas, Intermodal Facility and serve the Dallas/Fort Worth and Denver markets. The service between Barbours Cut and Alliance and between Barbours Cut and Denver will commence on June 2, with Alliance-Barbours Cut service operating on Tuesdays and Thursdays and the Denver service operating on Fridays. BNSF indicated that the frequency of these services might increase based on vessel arrivals to meet growing intermodal demand at the Port of Houston.
Port Houston has experienced significant growth, rising from the seventh to the fifth position among the top U.S. container ports in terms of TEUs (twenty-foot equivalent units) handled in 2022. The port has achieved record import and export volumes and is considered one of the fastest-growing ports in the United States for loaded imports and exports. It now holds a 7% market share of the total U.S. container business. Port Houston ranked fifth in loaded imports and third in loaded export containers in 2022, with the Transpacific trade lane leading in loaded imports and the Transatlantic trade lane leading in loaded exports.
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The Rebalancing of Cargo
Despite ongoing labor contract talks that have raised concerns about potential shipment disruptions, some U.S. importers are bringing cargo back to West Coast ports, according to company supply chain executives. The fears of labor negotiations only partly explain the market share losses experienced by West Coast container ports, including the busy Los Angeles/Long Beach port. Retailers and suppliers have been adjusting their distribution strategies, redirecting goods to the East Coast and Gulf of Mexico to position them closer to consumers. This shift has been driven by efforts to avoid labor disputes and improve efficiency. While West Coast ports handled 40% of U.S. container import volume in the first quarter of 2023, down from 45% in the same period in 2019, the rebalancing of cargo between coasts is expected to continue as importers reassess their supply chain strategies.
Some importers have also found alternative routes for their shipments to bypass tariffs and reduce costs. For instance, Million Dollar Baby, a nursery furniture seller, has been sending goods from China to the port in Ensenada, Mexico, which allows them to avoid a 25% tariff when selling those products to U.S. customers. Additionally, importing to Mexico offers cost savings in terms of warehouse and labor expenses. While the labor negotiations continue, industry experts anticipate that the rebalancing of cargo will persist, as shipping from China to Los Angeles remains the fastest and most cost-effective option. West Coast ports, despite the challenges, remain critical to many importers' businesses, including automakers such as Toyota.
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Unraveling the Inventory Bullwhip
Big retailers such as Target and Walmart are indicating that they have nearly completed the process of reducing their excess inventories and are preparing to restock their shelves with new merchandise for the fall. Target's inventories at the end of the last quarter were 16% lower than the same period a year ago, while Walmart reduced inventories in its U.S. store operations by 9% over the past year. The decrease in inventories suggests that space is opening up in their congested supply chains. Retailers rushed goods into U.S. distribution networks earlier this year, but as services spending increased and warehouses became overstuffed, retailers pulled back on orders from overseas suppliers. With inventory levels in better shape, retailers are looking to restock with fresh merchandise.
While inventories at U.S. general merchandise stores expanded 1.2% in March, retailers like Target and Walmart are optimistic about the future and are focusing on restocking efforts for seasonal selling periods such as back-to-school and the holiday season. However, retailers remain cautious as consumer demand remains uncertain. While there are signs of shipment trends picking up and the end of destocking, the actual increase in shipping volumes has yet to be seen. Retailers are closely watching consumer spending patterns and waiting for clearer signs of increased demand. Despite the cautious approach, retailers are hopeful that restocking efforts and inventory efficiency measures will drive a rebound in shipping and benefit freight carriers.