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Stronger economy, “logical” NAFTA outcome in store: STS


MISSISSAUGA, Ont. – The economy should continue to grow in Canada, the U.S., and globally, and logic should prevail during the renegotiation of NAFTA.

Those were some of the key messages from leading economists, analysts, and a motor carrier executive speaking at the Surface Transportation Summit here this morning. Carlos Gomes, senior economist with Scotiabank, said the global economy should accelerate to 3.6% growth in 2018, slightly better than the 3.5% growth it will show this year.

Strong consumer activity is now being joined by improving business investment to drive this growth. The recovery of the oil and gas industry means business development spending is on the rise in Canada, as well as globally. Here, the energy sector accounts for 24% of overall business development – nearly four times as much as in the U.S.

“That is beginning to recover, we are seeing business development in both Canada and the U.S. improve by around 3.5% this year, and somewhere around 3% next year,” said Gomes.

U.S. economic fundamentals remain strong, Gomes noted, with leading economic indicators continuing to strengthen and consumer spending and debt at healthy levels. In Canada, Gomes cited the housing market as a bit of a concern, especially in Ontario.

Asked about the impact the Donald Trump administration could have on Canada, and trade, Gomes said he expects logic to prevail. If it does not, there could be a major impact on Canada – especially the auto industry – as the automotive supply chains within North America are so highly intertwined.

“If Trump does want to improve or help the auto industry, the best thing he can do is avoid screwing it up,” Gomes said. “If he does screw it up, it’s going to impact them significantly, because the industry has become so integrated.”

Walter Spracklin, equity research analyst with RBC Capital Markets, shared Gomes’ optimistic outlook for the economy in 2018. He’s expecting to see greater truck freight volumes in 2018, but he said a stronger Canadian dollar could have a negative impact on cross-border activity. He also predicted tighter capacity next year, driven by further consolidation and the implementation of electronic logging devices (ELDs) in the U.S.

Spracklin said truck pricing remains weak, but could improve as capacity tightens.

“I’ve heard a lot about the driver shortage, but I haven’t seen a lot of tangible effects of the driver shortage,” said Spracklin. “Part of the problem is the demand isn’t there. Once that demand comes on where you have to look at your roster and pull some drivers in and find they’re not there, we’re going to get some pricing increases.”

As an analyst, he noted the most profitable trucking companies are those that treat every truck like a business, and track the profit-and-loss of each unit rather than the fleet as a whole.

“They key to profitability is to price your business appropriately,” he advised. “Focus on the return on capital.”

Spracklin also predicted carriers will be more selective when making acquisitions. Spracklin agreed with Gomes that NAFTA renegotiations shouldn’t end in disaster, if logic prevails.

“I agree with Carlos that it’s too important to mess up,” Spracklin said of NAFTA. “It’s too integrated and it doesn’t serve anyone well to mess up a good thing. However, logic doesn’t always prevail in politics, especially the politics we see going on right now. So, prepare for the worst and hope for the best. You have to be mindful that maybe logic doesn’t prevail and we do see some irrational activity. If a major restructuring of NAFTA occurs and he messes things up, in my view things can get ugly. But I think logic at the end of the day will prevail.”

John Larkin, head of transportation capital markets research, Stifel Financial Corp., said recent spot market price increases bode well for truckers, but that it’s difficult to quantify the effect the impending ELD mandate will have on rates and capacity. Strengthening spot market prices, he noted, may convince some small fleets to stay in business when they previously were considering exiting with the arrival of the ELD mandate.

“Those who were late in installing ELDs or have not to date, may have been thinking they’d just go out of business at the end of the year,” Larkin said. “With a 25% spike in rates, it’s possible they can make money if they follow the rules, which had not been the case for the last number of years now.”

Larkin said there are still trucking companies out there that regularly exceed hours-of-service rules to compete with better run carriers, which benefit from economies of scale on expenses such as fuel, and can more frequently update their equipment to gain better fuel economy.

Larkin said 1-2% of total capacity could exit the industry when the ELD mandate goes into effect at the end of the year. He’s projecting U.S. truckload rates to increase 5-10% in 2018, and LTL rates to go up 4-6%.

“It’s a terrific opportunity for carriers to take prices up,” Larkin said.

But Doug Munro, president and owner of Maritime-Ontario Freight Lines, is not as bullish on the year ahead. While he said 2017 has been a “pretty good year for most carriers,” and his company has invested in adding capacity and facilities, he said he has many concerns about 2018. Topping the list is the overheated housing market and the impact rising interest rates could have on homeowners.  He’s also concerned about the monetary fiscal policies of governments around the world that have in recent years conspired to keep interest rates low. Munro also said the strengthening Canadian dollar could hurt Canadian cross-border carriers.

“I’m being cautious, not knowing what the future holds,” Munro said. “You can make a lot of quick decisions but if you make one big one that’s wrong, you’re in a lot of trouble.”

That said, Munro said Maritime-Ontario is continuing to invest in new equipment on regular cycles.

 


James Menzies

James Menzies

James Menzies is editor of Truck News magazine. He has been covering the Canadian trucking industry for more than 15 years and holds a CDL. Reach him at james@newcom.ca or follow him on Twitter at @JamesMenzies.
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