Outlook 2006

by James Menzies, Adam Ledlow, Julia Kuzeljevich and Lou Smyrlis

TORONTO, Ont. – Who you know will be just as important as what you know in determining your fortunes in 2006.

The economic outlook for the coming year is proving harder to predict with the economy expected to grow at a more uneven pace. In such an atmosphere success will depend a great deal on which part of the country you operate and for which shippers you haul.

“There has been a big difference if you were working for the oil patch versus hauling automotive parts or paper over the past year,” points out David Bradley, CEO of the Canadian Trucking Alliance and our own Transportation Media Research confirms this trend will be magnified in 2006.

Still, Bradley remains bullish on trucking for 2006 for carriers who know their costs and resist the pressure to discount freight rates or fuel surcharges.

“There may have been some slippage in 2005 from the buoyant performance of the previous two years, but it is only a matter of time before the reality of continued cost increases for trucking labour, fuel and equipment set in. Those costs will have to be passed on,” Bradley says.

The biggest challenge will be faced by carriers servicing manufacturers in Central Canada, our research shows. Our annual Transportation Buying Trends Survey, conducted in partnership with the Canadian Industrial Transportation Association and CITT, includes the responses of more than 700 shippers across Canada. Sixty one per cent of respondents expected to increase their shipment levels in 2006, almost identical to the number which increased their shipment levels this year. When the manufacturing sector is looked at in isolation, however, the outlook for next year is not as rosy. Only 53 per cent of manufacturers expected to increase shipment levels next year. And there are further differences when manufacturing is broken out on a geographic basis. While 58 per cent of western manufacturers expect to boost their shipment levels next year, only 47 per cent of central Canada manufacturers expect to do likewise.

Looking specifically at how shipment volumes will affect trucking next year, 47 per cent of shippers across our survey sample expected to use more trucking services in 2005 (another 45 per cent expected their use of trucking services to remain the same, while six per cent expected to use less trucking and two per cent were not certain).

But only 40 per cent of shippers in the manufacturing sector expect to boost shipments next year. And the spread is quite pronounced when comparing shippers by region. Forty five per cent of Western Canada shippers expect to use more trucking services in 2006 compared to just 33 per cent in Central Canada.

Manufacturing and other heavily export-oriented sectors will feel the impact of a slowing global business cycle, according to Stephen Poloz, senior vice-president, corporate affairs and chief economist, Export Development Canada. The world economy grew by more than five per cent in 2004, and this momentum carried into the first half of 2005. That is too fast to be sustained, according to Poloz, so either a moderation will occur naturally or the always-vigilant central banks will make certain of it.

“In short, the sweetest part of the global cycle is behind us. The world will not fall off a cliff – rather, a moderation to more sustainable growth rates is in store,” Poloz says. “Throw a major energy price rise into the mix and we have a recipe for both stagflation and ‘Dutch disease.’ Stagflation will see slowing growth as measured inflation picks up. ‘Dutch disease’ will see energy sectors boom and other sectors come under stress. This stress will come from a combination of higher raw materials prices and slower growth in sales. The latter, in turn, will intensify competitive pressures and limit firms’ ability to pass along higher energy costs.”

The export sector – another key source of business for many carriers – also faces the challenges of rising interest rates and moderating sales growth. The possibility the Canadian dollar will fall from its heights offers a glimmer of hope that is not completely far-fetched, according to Poloz. He says recent research indicates clearly that the Canadian loonie has become a petro-currency.

“EDC’s statistical model shows that a rise in the price of oil of $10 results in an appreciation of the dollar of three cents. Accordingly, getting the dollar back below 80 cents means getting oil prices back to around $50. By the same token higher oil prices will push the dollar higher into the 80s,” Poloz says. “The immediate future depends on oil.”

Poloz reasons that slower economic growth should mean lower commodity and oil prices, and a firmer U.S. dollar. That spells a lower Canadian dollar for 2006, he says, but it’s likely to linger above 80 cents for the time being, unless oil prices suddenly correct upwards.

“We peg the dollar at about 82 cents going forward,” John Anania, assistant chief economist, RBC Financial Group, told truckers attending this year’s Ontario Trucking Association conference.

While that matches the long-term average set for the Canadian loonie and provides hope the situation won’t get worse, it also indicates it won’t get much better. The rising value of the Canadian dollar against the American greenback has a strong impact on Canadian carriers used to being paid in American currency. For example, a small carrier operating healthy 10 per cent margins on $1.5 million of annual business turns a profit of about $158,000 with the dollar valued at 63 cents. Yet with the dollar at 76 cents – considerably below current levels – that same effort results in a $112,000 loss. As Serge Gagnon, the much-respected president of XTL Transport warned carriers at the start of the Canadian dollar’s rise, if you are losing 20 per cent (on the exchange), you won’t be in business for long if you don’t address it. Unlike other issues, such as fuel, detention time and border security costs, however, carriers have been considerably less successful in introducing currency-related surcharges. Our Transportation Buying Trends Survey shows that only 11 per cent of shippers using truck transport are currently paying a currency surcharge.

The distinct challenges and uneven prospects are reflective of a North American economy that while continuing to grow has a fair amount of pent-up volatility. And it’s certainly making for some divergent forecasts among leading economic groups.

“The economic prospects for 2006 are tougher to call,” Bradley acknowledges. “It’s a mixed bag and trucking is a derived demand industry. So much depends on fuel prices, exchange rates and consumer confidence. On the one hand you have some economists talking about stagflation, while at the same time the Bank of Canada is taking steps to dampen activity saying that Canadian manufacturing is at full capacity.”

The differences in recent economic forecasts provided by TD Financial Group and RBC Financial Group for the Canadian economy are a good illustration of current market volatility and unpredictability. While TD Financial Group is forecasting a strong first quarter followed by successively weaker quarters for the remainder of the year, RBC is calling for mounting GDP growth for the first three quarters with a slight drop-off in the final quarter.

TD is basing its optimism for the first quarter in part on the stimulative effect of rebuilding New Orleans – there’s a great deal of material, services and expertise that will be required and Canadian business can only stand to benefit from the estimated US $100-$200B boost to the continent’s economy, according to Craig Alexander, vice-president and deputy chief economist, TD Bank Financial Group.

But Alexander is also concerned about what he believes is a housing bubble ready to burst in the U.S., and hence the downgrading of both U.S. and Canadian economic performance in the final two quarters included in TD’s forecast. Alexander explains that a considerable amount of property in the U.S. is being purchased for speculative purposes, driving up
prices. Housing affordability in the U.S. has fallen to a 13-year low with the California, southern and eastern seaboard markets particularly hard pressed. At the same time, he says, Americans have been using their houses like ATM machines, lulled into perhaps a false sense of security by low mortgage rates into remortgaging their homes in order to indulge their spending habits.

“This is the sort of thing that makes economists stomachs churn because you know it’s going to burst,” Alexander says. “You can’t tell exactly when it will reverse but when it does the U.S. economy will lose a lot of momentum. And I say it’s a question of when not if.”

He does caution, however, that this will make for a market correction, rather than a recession – a way for the North American economy to shake off some excess weight before gearing up for another growth spurt starting perhaps in 2007.

RBC’s Anania argues that Canada’s economy will head into an “excess demand” situation next year because the supply side of the economy is only growing by 2.5 per cent while our GDP faces a healthy 3.4 per cent rise.

Following is a regional forecast compiled by Truck News and Truck West.

The East

The old saying, “When it rains, it pours” can easily be applied to the trucking industry in Atlantic Canada. With a small population and sluggish economy, any big issues to hit the rest of the country tend to hit the Maritimes even harder.

Such is the case with the ever-present driver shortage, with both drivers and technicians from the East Coast fleeing to Alberta for higher paying jobs.

“It seems to be a seasonal thing when they leave. A lot of guys leave in the wintertime,” said Vaughn Sturgeon, president of Warren Transport in Rexton, N.B. and recently elected Atlantic Provinces Trucking Association (APTA) chairperson. “It’s a bit of an issue because we can lose a handful of good guys, depending on the size of the company. It can be a real impact on us.”

The pull of the West can cause companies to lose three or four drivers, up to a high average of 10. Some have reported losing as many as 20. Those numbers might not seem as shocking for companies in Central and Western Canada, but for smaller companies out of Eastern Canada, even a handful of departures can have an impact.

Unfortunately, the lure of Alberta’s booming economy is not an issue with an easy solution. Companies like Warren Transport find themselves increasing their rates all the time, but Alberta is putting up numbers that most can’t compete with.

“To be honest, I don’t really know what the answer for the problem would be,” Sturgeon said. “We’re putting our rates up all the time and perhaps over time it will even itself out a bit. It’s really more of a supply and demand thing. If one area has a booming economy, it’s difficult to stop them.”

Another cross-country issue is the sawmill and pulp and paper crisis, which is having a dramatic effect on trucking in Atlantic Canada, where the industry plays a large role in the region’s total economy.

“Here in Atlantic Canada it’s a large industry and we’re a smaller economy, so it’s hitting us pretty hard,” Sturgeon said.

To date, there have been several mill closures in the pulp and paper and sawmill industries across the region, and as Sturgeon said, every time you lose a big player out of the community, it’s a big hit for trucking.

“The trucking industry is a big part of (these two industries), whether it’s raw product going in or finished product going out,” he said. “Every time they go down, they take a lot of our business with them. It’s been pretty difficult.”

But like Alberta’s thriving economy, the fates of the sawmill and pulp and paper industries are essentially out of the trucking industry’s hands.

As a support industry, Sturgeon said trucking is essentially stuck. “Unfortunately we’re a support service to these guys: when they’re busy, they need us more; when they’re not, they need us less. We’re waiting for the two industries to turn themselves around.”

A problem unique to the Atlantic region is its regulatory system. The region consists of four separate provinces with four different governments, and therefore, four sets of regulations. For example, there are provinces in the region with different allowable freight limits, which means truckers hauling between the two provinces will have to haul to the minimum.

“It’s difficult for trucking companies (and) it’s difficult for shippers because they don’t understand why they’re not getting maximum loads,” Sturgeon said.

As a result, the trucking industry in the region has struggled, not only within its own ranks, but with neighbouring regions like Quebec and Maine as well. Sturgeon said the APTA has encouraged the different governing bodies and ministries for many years to work together, but it’s still an ongoing problem.

“We need the four governing bodies to work together and get some streamlined regulations that are the same throughout the region.”

In Newfoundland and Labrador, insurance issues have plagued the trucking industry for some time. Up until 2005, inter-provincial carriers were limited to only one insurance provider (Markel Insurance Company of Canada).

“As an association and a concerned industry group, we were concerned with the fact that we were limited to one insurance provider,” said Gordon Peddle, president of Mount Pearl, Nfld.-based D.D. Transport and 1st vice-chairman of the APTA. “Since then, the market has opened up a bit and we have the option of three currently. We’re making headway there, though choice is obviously still limited.”

Limited insurance choices notwithstanding, Newfoundland and Labrador also remains the only province with a tax on insurance premiums (15 per cent) and they’ve never really been given any reasons why. According to Peddle, all they know is the premium keeps getting bumped continually. Over the last year, Newfoundland carriers have met with the provincial Department of Finance expressing their concerns to the government. They’ve argued that they are at a competitive disadvantage compared to Marine Transport, as the insurance premiums for Marine Transportation are not taxed.

“(The APTA) and some members of the association are paying the services of an accounting firm to try and get our money back on that insurance tax that we’re paying,” Peddle said. “We’re suggesting to get rid of it altogether.”

The province and the APTA are hoping to have a solid update later this year.

Newfoundland and Labrador did receive one good piece of news at the end of 2005, when it was announced that the Government of Canada would maintain Marine Atlantic’s drop-trailer service under certain conditions.

The fate of the drop-trailer service first came into question May 6, when an advisory committee examining the future of Marine Atlantic made 41 recommendations for improving ferry service, including one that suggested the service be dropped to improve efficiency. After hearing stakeholders’ views and commissioning a study on the impact of the elimination of the drop-trailer service, the Government of Canada decided to continue the service under three conditions. The conditions require an acceptable level of cost recovery for the service, a more efficient handling of the service by Marine Atlantic, and an improved effort by the trucking industry to work with Marine Atlantic on initiatives to better manage traffic demand.

At the time of publication, only three weeks had passed since the Transport Minister’s announcement and though Peddle said the APTA hasn’t had a chance to figure out exactly what the three conditions mean, he’s confident that they will be able to reach a resolution.

“There are some things that need to be addressed in the process from both Marine Atlantic and the trucking industry and I think with some cooperation between the two parties, we can come up with a solution that will make it work,” he said.

The West

Carriers from Atlantic Canada may
complain that their drivers are being lured to the west, but if that’s the case it’s still not enough to alleviate the shortage of qualified drivers in Western Canada. Ask any of the Western association heads what their most challenging issue is for 2006 and you’ll get the same answer: “People, people, people,” says Manitoba Trucking Association (MTA) president, Bob Dolyniuk. “We have fleets sitting with idle trucks and it’s not getting better, it’s getting worse.”

It’s a sentiment that’s been echoed throughout the West – and all of Canada for that matter. On the West Coast, the industry is shaping up for a solid year, according to B.C. Trucking Association president Paul Landry.

“Generally speaking, things look pretty good for the industry,” he told Truck News. “B.C.’s economy is leading the country in terms of growth and our industry is very busy and rates are firm.”

While the trucking industry in B.C. is benefitting from a strong provincial economy, Landry points out that poses additional challenges as well.

“Unemployment in B.C. is at 4.4 per cent which indicates to me that we’re pretty much at full employment and anybody who wants to work is working,” he pointed out. “That suggests to me we’re going to struggle to find truck drivers and other workers for the industry.”

Landry said the Port of Vancouver has taken steps to restore stability to its operations by extending truck gate hours by 20 per cent in 2006 and a further 20 per cent for each of the next four years.

“That’s very aggressive and a positive approach to dealing with port congestion issues,” Landry said. “I’m hopeful that this will essentially keep frustrations under control and keep the port open.”

Across the Rockies, Alberta is also enjoying a thriving economy but even the nation’s wealthiest province can’t solve its driver woes, says Alberta Motor Transport Association (AMTA) executive director, Mayne Root.

“The biggest concern of the industry is getting qualified drivers,” he lamented. He said the TT&DA training program that has been in the works for years now may finally become a reality in 2006 and that could go a long way towards attracting people to the industry. It’s an apprenticeship-type program based on the Earning Your Wheels training standard.

“We’re anticipating we’ll be able to start getting people involved in that program by the middle of next year,” said Root.

In the Land of Living Skies, Saskatchewan Trucking Association chief Hank Wolbaum says the cost of fuel is a concern. Another challenge will be to conduct business in a region that is notorious for its crumbling infrastructure.

Wolbaum also said improvements are needed at the province’s primary commercial border crossing to minimize delays. Saskatchewan fleets also would like to see improved harmonization of regulations through neighbouring jurisdictions.

The MTA’s Dolyniuk says Manitoba is exploring the use of immigration to address its driver shortage but while the province has a provincial nominee program he said “while the rules may be the same, the application of the rules may be different from jurisdiction to jurisdiction.”

As 2006 approaches, Dolyniuk said Manitoba carriers are also concerned about their escalating operating costs.

“We know most companies are applying fuel surcharges but in some sectors they’re still getting pushback from shippers,” he said.

A struggling rural economy is another challenge facing the province’s trucking companies in 2006.

The fact rural roads in Manitoba are not up to par exacerbates the problem for carriers serving the province’s rural communities, Dolyniuk pointed out.

He said government likes to build new extensions and bridges so it can host ribbon-cutting ceremonies but there are many roads that have been ignored.

“Twinning the Trans-Canada Highway is wonderful but you can’t look at that in isolation,” he said. “There are many roads in southwestern Manitoba that are literally crumbling and that kicks the rural economy once again.”

Despite the challenges, Dolyniuk remains optimistic when looking ahead to 2006.

“On the international scene, we’re under-capacity southbound which has driven rates up and driven up demand,” he said.

And enhancements at the Canada/U.S. border in Manitoba have resulted in a smooth-flowing border.

Overall, the leaders of the Western Canadian trucking industry conclude business should be good for the industry in 2006 but many challenges such as a shortage of qualified drivers, inadequate infrastructure and struggling rural economies remain.

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