The condition of road freight in North America is less confused than, say in Europe, but still fraught and unpredictable. The US and Canada have both avoided much of the supply-side crunch experienced in Europe, China and some other parts of the world. Demand is more similar, although less spikey. Initial indications are that prices have risen strongly on major routes but the demand situation may be brittle.
The present indications suggest that capacity is leaving the market as smaller freight fleets suffer stress and shrink their operations. The short-term likelihood is that this segment of the market will begin to see business failures. This may be affected by extraordinary fiscal policy, such as offers of short-term liquidity from government, however, in the near-term, the effect on the market is to moderate any collapse in prices.
One key aspect of the supply-side in North America is the superior functioning of the borders between Canada, the US and Mexico. Canada and the US in particular have agreed to expedite ‘essential’ truck movements. Mexico is a slightly different situation as truck crossings are limited to a narrow geographical strip. Never-the-less we are not seeing the congestion seen in other parts of the world.
Similarly, North American ports are not suffering from a lack of landside transport. They may be suffering from many other issues as a result of fluctuating demand and the congestion that results but truck transport in and out of the ports is available. However, the condition of sea freight is known to be having a severe impact on ‘drayage’ at the ports although the speed of development and the wild swings in demand have confused even the truck companies themselves. It is strongly suspected that volumes at the West Coast ports are down by 50% month-on-month for March.
A further problem for demand-side in trucking is the shortage of return-trips or backhaul. If these are not available certain truck providers will withdraw from the market. This is believed to be reducing capacity and driving-up prices on certain routes.
Demand was already softening heading into March and the effect of the COVID-19 has been severe but not catastrophic. Demand softened in the third week of March and fell precipitously in the fourth week. However, the level of disruption in the economy has had the effect of reducing the operational efficiency of many road freight services, with extensive delays at pick-up and drop-off points and sudden shortages of services or equipment. This, combined with what might be called a sense of panic in certain sectors has driven up freight rates on many major routes. This may not be sustainable in even the short-term with the balance between supply and demand suggesting a sharp fall in prices. What may be sustaining the increase is a degree of market dysfunction as road freight providers struggling to shift capacity out of market segments that are falling and into those that have growing demand.
The level of dysfunction in the market has been less in the US than elsewhere, however, the deformation of demand has still been significant. To analyse by vertical sector:
The general feeling – and it is really no more than that – is that even over a period of a few months the road freight sector will begin to consolidate. This is both through a combination of bankruptcy and merger & acquisition. In part this may be an adaption to the new ‘equilibrium’ in the market. However, caution should be shown over this opinion. Equilibrium in the road freight market is driven in great part by the low entry barriers in road freight. It will be interesting to see if any new players evolve a new business model that circumvents this aspect of the market.
What may happen is that the market changes its structure. This may be the key to the emergence of new business structures. It is easy to suspect that these may be driven by the increase in e-retail activity.
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Source: Transport Intelligence, April 09, 2020
Author: Thomas Cullen