Looking ahead at freight rates

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How much will truck transportation rates increase in 2011? In this note, we will review the situation and make our prediction. As of this writing, we believe that rates will increase next year. However, several factors combine to make the crystal ball a little hazy, so the extent of the increase is still uncertain.

How Prices Have Changed Over The Business Cycle

The Canadian General Freight Index, published by Nulogx, gives us a good look at how general truck transportation rates have changed during the business cycle. Average freight rates were rising quite quickly in the first half of 2008 at nearly 15% a year. Even though the economy slowed for the next four quarters, average freight rates continued to grow for three quarters until April 2009. However, they grew much more slowly, at nearly 4% per year. From April 2009 through the first quarter of this year, average rates came down and stayed down. They fell 7% in the year, right back to early 2008 levels. Since April of this year, average rates have been growing, and appear to be growing reasonably quickly as the economic recovery continues.

The old saw that you can drown in three inches of water does apply to truck rates. Nulogx data reveals that Canadian/US cross-border truckload and LTL rates have been more volatile than Canadian domestic rates. They were slower to respond to the falling economy, fell farther, and have been more sluggish to bounce back.

How Fuel Surcharges Have Changed Over The Business Cycle

Although rates drive freight costs, the other key factor is fuel surcharges. Throughout 2008 and into the first quarter of 2009, average fuel surcharges followed in lock step as the price of crude oil first peaked in June 2008 and then declined sharply to its bottom in February of 2009. But then something interesting happened. Although the cost of crude has returned to the $US75- $US85 per barrel range, average fuel surcharges have not bounced back as much. Shippers have had the benefit as fuel surcharges have been slower to adjust upwards.

Going Forward

What does all this mean for rates and surcharges next year? Carriers clearly want rates to increase -and the evidence is that the increase began in the second quarter of this year.

But the economic recovery is still very sluggish, and this is bound to hold back the increase in transportation rates. As of this writing, the third quarter GDP results are not yet out -and there is still the possibility of at least one quarter of negative growth in 2010. Even if we don’t double dip, most observers agree that growth will continue to be slow well into 2011.

There is also uncertainty about where the cost of crude will go, and therefore fuel surcharges. So far, the weak global recovery has kept both the demand for oil and its price relatively contained. Until the global economy is firing on all cylinders, we won’t really know where oil prices are going.

If the recovery continues much as it has, we believe that general truck freight rates will grow at an average annual rate of from 3% to 5% in 2011. If the economy weakens a little, look to the low side.

We expect average fuel surcharge as a percent of base freight costs to stay in the 13% to 16% range, as long as crude oil costs do not rise sharply.

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Truck News is Canada's leading trucking newspaper - news and information for trucking companies, owner/operators, truck drivers and logistics professionals working in the Canadian trucking industry.


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