Soaring Loonie could undermine trucking recovery: analysts

TORONTO — A loonie in flight could ground somewhat the projected growth of freight volumes in the coming months, according to transport analysts at National Bank Financial’s Economics & Strategy Group.

A stronger Canadian dollar could undermine export sales out of central Canada, especially from the manufacturing sector, "which could represent drag on recovery and negatively impact the dry van business in the transborder truckload as well as LTL sectors," analyst David Newman reports in a recent NBF bulletin.

"With the Canadian manufacturing sector relatively dormant, the rising loonie could squelch any rally, to a certain degree. There are many in the industry who believe the industry has witnessed a structural change, prompted by the last rally in the Canadian dollar, and then subsequently supported by the recession."

Also, the report notes, a weaker U.S. dollar makes U.S.-based carriers more competitive on pricing in cross-border lanes, although the impact on domestic carriers is likely to be relatively minor.

The good news, though, is that increasingly more Canadian carriers are gaining confidence in a general rebound in the economy and freight volumes. Freight demand is "bumping along a new-found support level," with sequential improvements pointing to better days ahead.

What’s more, while "stubbornly high" levels of inventory relative to sales has hindered recovery to date, the ratio has improved dramatically in the last few months. NFB notes that some industry reports suggest that a large proportion of shippers do not expect to increase inventory levels for several more months.

However, with an expected resurgence in fuel costs, a portion pricing growth could come from fuel surcharges. 

The peaks and valleys of the Canuck buck
over the last eight years. Source: NBF.

As the most competitive of all truck markets, NBF expects truckload to remain under pressure until demand recovers. While it will likely be the first segment to recover, it could permanently lose some business in light of a rising Canadian dollar, which is undermining Canadian manufacturers’ competitiveness.

"Even … once demand recovers," though, the analysts expect "some carriers to gradually shift to an asset-light strategy and instead rely more on third-party carriers-brokers to satisfy incremental demand, which should benefit cash flow, margins and returns."

LTL volumes will likely remain depressed until the second quarter 2010, but could grow at a mid single-digit rate in 2010.

Longer term, though, LTL pricing will be more challenged than truckload, given the importance of covering fixed network costs versus a more variable cost structure — mainly in labor — that exists in truckload, which can be more readily adjusted to demand.

Pressure on LTL rates remains more intense in the West (reportedly twice as worse as the East, according to some figures NBF has researched) especially in the smaller cities and towns.

"Specifically, while carriers may be able to secure the required density on the fronthaul of a move, the backhaul business remains weak, which means price is being used as lever to fill up the trucks."

Aggressive and "unprofitable pricing tactics" are widespread in trucking, especially in LTL business "as carriers focus on maintaining and gaining market share in the downturn."

To that end, carriers have not seen much impact from the potential failure of YRC Worldwide, although, as the report acknowledges, they would "stand to benefit handsomely if YRC eventually succumbs to the pressure."

That scenario, however, is becoming less likely as long as the giant Kansas-based carrier continues being successful at reaching concessions with its union and lenders, NBF states.

Meanwhile, specialized companies that dabble in freight forwarding, customs brokerage, warehousing, oil & gas, and waste management are running hot and cold. Many are exposed to the same economic difficulties, although some worse than others depending on the vulnerability the industry has to pricing weaknesses.

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