COVID alters road freight pricing dynamics

The COVID-19 pandemic has added increased complexity into the pricing structure of European road freight. Changes in the cost base, particularly in diesel prices, as well as usually small fluctuations in supply and demand tend to be influential in shaping road freight rates, but the pandemic has led to much more violent and unpredictable variations in a number of factors.

Diesel prices are a key cost component of European road freight. Ti analysis on GSCi shows it can account for between 20% and 40% of the non-structural costs involved in long haul European trucking. There is a strong correlation between diesel prices and freight rates, as explored further in the Ti & Upply Q2 European Road Freight Rate Development Benchmark. Although longer term rises or falls in diesel prices do tend to get captured in rates, strong weekly fluctuations are often not captured immediately. This is because of contract rates agreed in advance between shippers and carriers and because of the contracted purchasing of diesel by larger carriers, with prices sometimes agreed months in advance. Nevertheless, these pump price changes still make a difference. An 8% fall in diesel prices in H1 (Eurostat) was beneficial to carriers overall.

Wages are the other major component of non-structural road freight costs. These tend to be relatively steady on a month-to-month basis, although sharp rises in wages in Central and Eastern Europe as a result of recent strong economic expansions are affecting carrier costs to an extent. Apart from this, other cost components such as taxes, insurance and tolls tend to show steady increases over time.

The first half of the year saw COVID severely weaken European road freight volumes. This lack of demand in isolation would tend to lead to a fall in prices, according to general supply-demand economic theory. Ti estimates the market contracted by approximately 10% in real terms in H1, an extreme drop in a market that tends to grow in low single digits year-to-year.

However, even though demand slumped overall, the pattern across trade lanes was highly volatile and unpredictable, which also influenced rates. For example, demand in pharmaceuticals and consumer electronics remained strong, but automotive and other manufacturing volumes were much weaker. Where a fronthaul and backhaul consist of different sets of these goods, pricing dynamics can be affected. For carriers on international routes, the backhaul load is often critical in fronthaul pricing. If the possibility of getting a backhaul load is less certain, carriers have to price up the fronthaul to ensure they can cover their costs on a potentially empty or only part-full backhaul. Note, this can also be an issue for domestic hauliers.

Supply was affected as well to varying degrees. Government furlough and job retention schemes effectively led to limits on available capacity to varying extents across Europe. Although strikes or bankruptcies can have this effect too, this dynamic is unprecedented at such scale in the road freight market.

COVID has had some other very direct effects on some elements of road freight pricing, particularly on the international side. By nature, these tend to be longer routes, with higher complexity in terms of route planning, traffic and border disruptions. The latter was a particular issue in March as many European countries shut their borders or implemented stringent checks on the movement of people. Although these restrictions did exclude freight movements, it did nonetheless cause significant queues at borders for trucks. This time delay was priced in on routes where this was most prevalent.

The ability of violent swings in certain price-relevant factors to dramatically alter rates is limited due to the margins of carriers. They tend to operate with thin margins, often in the low-single digit range. This means prices cannot effectively breach a certain floor, or else carriers will not be able to carry the load profitably. All carriers remain in this situation to varying degrees, limiting the ability of demand slumps to push prices down too sharply.

Whilst some of these COVID dynamics ought to lead to price hikes and others to price falls, the overall effect of these dynamics appears to have been to push prices down. Ultimately it appears that the economic shock and fall in demand has led to carriers accepting lower prices. This was shown in the performance of the Ti & Upply Development Benchmark rate over the first half of the year, as well by the results of some major carriers. DHL Freight saw an 8.7% fall in revenues despite volumes only falling 0.9%. At DB Schenker, volumes fell 4.1% over the first half, but revenues fell by a sharper 9.9%. At Waberer’s, volumes fell 18.2%, with revenues down 32.3%. Although currency fluctuations will have an impact here, the main factor pulling revenues down lower than volume growth is a decline in prices.

Looking forward, the second wave of COVID will have an impact on prices. However, given borders remain open and governments appear unwilling to impose lockdowns similar in stringency to those seen in the first half of the year, demand is unlikely to fall again to such alarming lows and in fact is likely to continue recovering towards the end of the year. Less volatility may lead to less of a necessity to inflate prices. However, many factors point to a potential rise in rates, notably the expected pick up in demand, higher diesel prices and pressure on carriers to increase prices to retain viable margins.

Source: Transport Intelligence, October 13, 2020

Author: Andy Ralls

Ti’s Mid-Year Market Sizing Update for the European Road Freight Market will be released on GSCi in the coming weeks. For more information, please contact Michael Clover, Ti’s Head of Commercial Development, at [email protected]