With capacity constraints at the beginning of the year, on the heels of pandemic, transportation rates challenges from the first half of 2021 should continue into the second half.
- Capacity demands drive up rates across full truckload’s spot and contract markets.
- Costs increase in less-than-truckload lanes, even while service declines.
- Small parcel carriers look ahead to another holiday peak, even though consumers’ e-commerce appetite has gobbled up capacity since the last peak.
- International shipping still bears the weight of global pandemic, exacerbating global supply chain disruption.
- And fuel prices are driving up costs everywhere.
Serving your customers in this environment depends on your consistent visibility to transportation activities and costs. Moving freight requires strong partnerships with reliable providers, contingency plans – and patience. Controlling costs relies on ongoing analysis of strategy, compliance and performance, as well as agile course correction supported by experts.
Read on to understand the Q3 transportation rates trends that will affect your transportation management and get advice to help protect your performance.
Economic Conditions: Diesel Fuel Prices Increasing
U.S. diesel fuel prices have climbed 38.5% from a low in November. That is affecting transportation costs. Parcel carriers are escalating fuel surcharges, and fuel costs will be an increasing factor for over-the-road freight, especially during the traditional summer travel and shipping season.
The Energy Information Administration (EIA) forecast shows that the average diesel retail price per gallon is $3.29 as of June 21, the highest average since May 28, 2018. Diesel fuel prices averaged $2.55/gal in 2020. EIA’s updated 2021 forecast is an average $3.07/gal., an increase of 13 cents since Q2 estimates.
Economic Conditions: How Do Transportation Rates Affect Revenue for Goods Produced?
The Producer Price Index (PPI) measures cost trends for everything manufactured in the U.S. This custom performance index reflects the rate of PPI change compared to the rate of change in transportation costs.
Performance indices for Parcel, LTL and Truckload increased year-over-year and quarter-over-quarter as capacity constraints persist across all modes. Of note, the Truckload index increased 28.5% YOY and 12.8% since January 2021. LTL increased 9.1% compared to 2020, and 4.1% compared to January 2021. Parcel continues climb as well, rising 7.8% YOY.
Economic Conditions: E-Commerce Sales Climb Continuing
First quarter 2021 e-commerce sales reached $215 billion, a 7.7% increase over Q4 2020. Year-over-year, the Q1 2021 e-commerce estimate increased 39.1%. While consumers’ return to physical stores may affect some e-commerce activity, analysts expect strong sales to continue.
One survey of more than 1,000 consumers in late March and early April by consulting firm AlixPartners LLP showed one-third of U.S. shoppers plan to continue buying clothing online, while 25% intend to keep ordering groceries that way.
U.S. Department of Commerce announces the Q2 2021 e-commerce retail sales estimate August 19.
How does this affect your cost?
Do you use poly mailers, shipping bags or shrink film? Ongoing domestic demand driven by e-commerce, pharmaceuticals, hygiene, food and home meal deliveries all pressure prices on polyethylene products used in your supply chain.
- Resin prices up 87% cumulatively over the past 12 months.
- Suppliers announced 5-7 cent per pound increase in June, following a 5-6 cent increase in May.
- Supply is extremely constrained, and sales allocations or force majeures remain in place for most producers.
- Upcoming hurricane season could exacerbate supply constraints as plant operations struggle to reach full capacity.
Transportation Rates Environment: Small Parcel
Ongoing issues will continue into Q3. Capacity constraints will become more pronounced ahead of the holiday peak season as retail sales events such as Amazon Prime Day, back-to-school and Labor Day sales events lead into a holiday peak season beginning in October.
UPS continues to focus on value versus volumes. If a shipper’s volumes are not profitable to UPS, they could either be dropped as a customer, experience capacity cuts and/or higher rates and surcharges. FedEx is also embracing value over volumes and is implementing similar measures.
COVID-related peak surcharges from UPS remain in place apart from surcharge changes implemented on July 4 and continuing through Jan. 15. Based on how much a shipper’s average weekly volume increases compared to the average weekly volume in February 2020, the surcharges could reach $6.15 per package.
Large package shippers face additional problems with UPS surcharge increases, including a 50-cent hike on “additional handling” effective July 4. From Oct. 3 until Jan. 15, that fee increases to $6 per package, a jump of $3 compared to today’s cost.
FedEx is likely to follow suit with similar surcharge changes for holiday peak season.
Crowd-sourced delivery platforms such as Instacart and DoorDash are expanding their partnerships with retailers and services. Other logistics providers are moving into the parcel management space. We will likely see more moves linking freight brokerage and parcel management as a way to provide a one-stop-shop to manage freight and parcel capacity.
Q3 Action Advice: Parcel Transportation
Diversification of last-mile solutions will be even more important as more carriers limit capacity. Shippers need to quickly lock in capacity requirements with carrier partners for the peak holiday season and also have back-up plans just in case carriers cut shippers’ capacity. A contract will not necessarily save a shipper.
For the rest of this year and likely into 2022, shippers need to be creative in managing their last-mile strategies while keeping a careful watch on their costs. Those with storefronts will prove successful by offering alternative last-mile solutions such as curbside and buy-online-pick-up in-store (BOPIS). Shippers without a physical store may want to consider partnering with a storefront retailer or another operator.
Shippers will continue to struggle with higher supply chain costs, capacity constraints and delays for the foreseeable future. As a result, regular communications with supply chain partners and customers will be necessary as inventory stockouts, and delivery delays may become the norm versus the exception in the coming months
Transportation Rates Environment: Less-than-Load
Q3 is busy season for LTL transportation. This year, expect costs to increase and service to decline as capacity gets tighter and temporary targeted embargoes continue.
- Labor shortages accompany the summer vacation season for LTL drivers and dock workers. Open positions with high wages and sign-on bonuses are difficult to fill.
- Retail volume is moving in support of the Q4 holiday peak.
- As parcel service levels suffer, shipment consolidation drives volume into LTL.
Many major carriers are not accepting new business, and others that are taking RFQs will not likely publish until later in the quarter.
National LTL fuel surcharge averages are consistently trending upward.
Expect some carriers to pursue out-of-cycle annual business reviews and implement transportation rate increases, especially if your shipping characteristics are cost-intensive.
Maintain skepticism for carriers’ announced “on-time performance” especially as service delay designations can eliminate shipments from that metric.
The FedEx Freight move to reduce outbound volume for 1,400 customers – and then rescind the service cuts following blowback from large retailers – is indicative of ongoing capacity challenges. Other carriers are asking customers to limit shipment sizes in certain lanes.
Potential Disruption: On July 5, FedEx Freight implements an unprecedented peak surcharge on LTL shipments to nearly 1,000 zip codes, about 2.3% of zip codes in the U.S. Th
Q3 Action Advice: LTL Transportation
Stick with your existing carrier partners. Collaborate with them to work through service issues. Consider an alternate approach to cost control.
- Blocking a service provider only puts your committed capacity into the hands of another shipper.
- When many carriers are not accepting new business, you might not find capacity elsewhere.
- In the current environment, another provider is unlikely to improve service levels.
Allow for more time in transit and plan accordingly. Important steps to take include setting expectations with consignees, adjusting inbound material orders to maintain production and communicating with customer service to prepare for response.
Regional and deferred-service carriers, even local couriers, offer alternatives for small impact moves where there’s no capacity available or you are affected by an embargo (including FedEx Freight’s limit on volume). Expect a slower level of service. which is better than no service. Expect a slower level of service.
Transportation Rates Environment: Full Truckload
All indicators point toward a full truckload environment with tighter capacity, elevated contract transportation rates and astronomical spot rates continuing into Q3.
- Truck delivery delays
- Inability to hire drivers
- Ongoing capacity demand
Recent Purchasing Managers Indexes revealed elevated expectations for future growth in production – and products on the road.
Food and beverage shippers moving freight into grocery warehouses continue to face chargebacks for missing delivery times or not fulfilling an order in full.
Expect a brief “breather” toward the end of July, potentially into August and September, but do not plan for a downward trend in rates and capacity demand ahead of the retail peak season.
Produce season in Q3 creates added strain on capacity in traditional patterns that vary market to market, but don’t expect it to be more than another aggravator in the cost environment.
International shipping disruption continues to waterfall into over-the-road transportation:
- Smaller shipments are moving into LTL lanes.
- Increased on-shoring of manufacturing is driving more freight into over-the-road capacity.
- Intermodal transit times and rates are up, eliminating modal conversion as an option.
While some spot market rate relief may come in late July, do not expect contract rates to follow.
Q3 Action Advice: Truckload Transportation
Be flexible with pick-ups and deliveries – even within shipping hours.
Lead time goes hand-in-hand with flexibility, and it is paramount to tender acceptance.
Maintain a realistic understanding of your capacity consumption and carrier service levels.
Carriers are not chasing higher-dollar freight, generally, but they may be hauling an equal or larger volume of business than last year in a more cost-intensive, capacity constrained environment – especially if your sales are up.
For freight enduring added cost when moving into a facility with a chargeback program for “on time and in full” (OTIF), understand the cause and frequency of the charge and make a business decision of absorbing that cost versus penalizing your carrier partner. Penalizing your partner may mean paying more on every load.
Transportation Rates Environment: International
Coming into traditional peak season in the August timeframe, COVID-driven port closures in southern China are causing severe disruption in ocean shipping. This will have a long-lasting effect on supply and demand for containers, ocean and air capacity. Demand for inbound shipments will continue to surge.
Everything that is moving is moving at a premium and moving with surcharges. Shipping costs are at historically high levels. These costs are going to increase in a substantial way over the quarter, in some lanes by multiples of their cost prior to COVID.
Demand for air freight is increasing, driving up costs as capacity issues build, especially until passenger flights fully resume. This limits further your ability to contingency plan for international freight.
Port congestion on the U.S. West Coast is slowly improving. It is still a challenge, but throughput is gradually getting better. The opposite is true on the Asian side of the balance, but as ports re-open fully returning vessels could make West Coast ports a greater pinch point.
Expect ocean shipping disruption to continue through peak season. This not only affects significant volumes coming from Asia, it affects U.S. exports as well. Container demand in Asia is high and drawing empty equipment back to China without waiting to match with a U.S. export load. This will continue to have an impact into Q4 and 2022.
Q3 Action Advice: International Transportation
Acknowledge the reality, prepare for higher costs, and consider a unique approach. Larger companies with buying power are being extremely creative to solve challenges. Not every business can buy a container ship (like Home Depot), but small- and medium-sized business need to explore outside-the-box solutions.
Be prepared to quickly shift modes, going from ocean to air. Find ways to shift equipment, taking advantage of capacity where you can find it, even if it isn’t your typical container. Can you mix up how you are consolidating? Be flexible about your point of origin.
Strength of partnership is more important than ever. A lot of shippers are fighting for space, and it is not just a cost game. This is where it helps to have trusted providers in place.
Import planning and forecasting is difficult in this environment. Depending on your industry, planning and projections are traditionally complete for the coming peak season. This environment calls for extending that timeline forward where you can, working with vendors and planning on a longer time horizon. This can help avoid disruption and position you to better react when it does happen.
Examine your inventory planning as ongoing disruption strains just-in-time strategies. Conditions in the transportation marketplace may factor into the discussion around a different inventory approach that mitigates risk and buffers some of the impact on the end customer.
Transportation Rates Environment: Indirect Spend
Freight and labor costs, as well as demand, are up in recycled paper and corrugate markets.
- Paper costs increased $100/ton cumulatively the past six months, but stability is expected until Q4.
- Recycled paper demand was up 6% in Q1.
- New grocery bag machines coming online adds additional pressure on kraft paper supply.
- Two large lightweight kraft paper producers left the market, transitioning to alternate heavyweight kraft and linerboard products. Mills are “sold out,” and inventory is 75% of desired levels.
- Box shipments were up 6-8% in Q1.
Linerboard costs increase $110/ton cumulatively since November 2020. Carton prices up as much 20%.
- Box shipments were up 6-8% in Q1, and containerboard mills are unable to keep up with demand increases. Production was up 9% in March, year-over-year.
- Old Corrugated Containers Prices increased in May for the sixth consecutive month.
Major office paper producers announced increases to take effect July 1 after 6-8% increase in March.
Pallet Prices are up +50%, and supply is very short. Manufacturers are urging shippers to find alternatives.
Truckload Transportation Market Conditions
- Truckload transportation rates forecast to remain high but steady, then increasing during capacity crunch season, which accompanies the produce season and leads up until the July 4 holiday.
- Fuel prices are part of the conversation again. EIA forecasts predict summer diesel prices will be higher than last year but then reflect a normal dip.
- Most equipment types (van and reefer) are experiencing a drop in demand, but do not expect a dramatic effect on rates.
- Short-term contracts will come at premium rates and so will spot market pricing, but tender acceptance will be good.
- International Road Check may cause disruption May 4-6 and into the following week. Demand may increase due to reduced freight movement during the highway safety inspections.
- Advice for Q2: Maintain consistency with your carriers, trying to contract where possible to avoid an elevated spot market. Careful procurement practices in the months ahead (contract vs. spot market freight) sets the stage to capture downward price trends in transportation rates during the second half of 2021.
Less-than-Load Transportation Market Conditions
- Demand on LTL capacity is unprecedented, driving some carriers to decline new or expanded business in order protect service to their existing customers.
- Expect embargoes to continue in lanes affected by volume spikes and capacity constraints.
- Carriers continue to scrutinize each piece of business, monitoring payables, escalating collections, limiting credit and diverting capacity to “shipper of choice” customers.
- Pricing renewals are increasing and so are rates sought by LTL carriers, especially those emboldened by aggressive new price “right-sizing” promised by UPS Freight’s new owners, TFI International.
- Q2 Advice: Rely on analysis – not rates – to achieve savings. There’s no ground to gain in procurement and rate negotiations, but routing decisions and least-cost carrier selection will maximize your transportation dollars.
Small Parcel Transportation Market Conditions
- Both UPS and FedEx are taking a more intentional approach to pricing.
- FedEx rebrand from SmartPost to Ground Economy opens opportunity for broad pricing adjustments focused on improving revenue quality of packages delivered.
- UPS “better not bigger” approach is emerging: evaluation of customer contracts, volume caps and negotiation of mid-term increases to certain customers.
- Capacity challenges continue for FedEx, UPS and every major regional small package carrier, allowing each to be selective on the volume they accept.
- Peak surcharges and certain suspended service guarantees spurred by COVID continue – but for how long? UPS and FedEx re-instated guarantees for some services, but we expect many others to be suspended until the country re-opens more fully.
- The UPS move to zonal pricing for Additional Handling Surcharge and the Large Package Surcharge will have a material impact for many shippers.
- Fuel surcharges are escalating quickly since the start of 2021.
- Advice for Q2: Begin planning for Christmas 2021 today. Lessons learned through expert analysis of your 2020 data can help you design a small parcel program that protects your profit margin, controls cost and supports service to your customers.
International Transportation Market Conditions
- Lingering effects of the Suez Canal disruption will continue for several months.
- Port congestion has expanded beyond West Coast backlogs to include East Coast ports, and booking availability is sparse after an over-booked April.
- Ocean transportation rates remain high, capacity is still extremely tight and the challenges in the domestic logistics funnel (drayage and rail) remain high.
- Tightening ocean capacity is driving up demand and rates for air freight.
- Advice for Q2: Reassess your inventory strategy. Global supply chain disruptions highlight the weakness of lean, just-in-time practices and may emphasize your need for additional buffer inventory, especially if your e-commerce fulfillment relies on import/export activity. Contingency planning should be part of each strategic planning meeting as we go through 2021.
Indirect Spend Market Conditions
- E-Commerce demand is growing faster than capacity and packaging costs continue to climb.
- Corrugated prices increased 10-12% in March – on top of increases announced in November 2020.
- Expect stretch film manufacturers to announce another increase in April.
- Paper board tubes and cores are increasing at least 6%.
- Lead times are expanding out to 4-8 weeks.
- Costs are up 17% since November 2020 on recovered paper and old corrugated containers (OCC).
- Two large office supply providers announced copy paper increases of 6-8% in March.
- According to the ISM Report on Business, activity in U.S. manufacturing grew for the 10th consecutive month in March, reaching a PMI reading of 64.7 – the highest in 37 years. The U.S. Industrial Production Index registered 104.65 in February – up 13.38% since March 2020.
Economic Conditions: Diesel Fuel Prices Climbing
U.S. diesel fuel prices have climbed 32.1% from a low in November. That is affecting transportation costs. Parcel carriers are escalating fuel surcharges, and fuel costs will be an increasing factor for over-the-road freight. The Energy Information Administration (EIA) forecasts summer diesel prices will be higher than last year.
Average retail price per gallon was $3.18 on May 10, up 4 cents from May 3, but still below the March 22 peak of $3.19, the highest average since Dec. 3, 2018. Diesel fuel prices averaged $2.55/gal in 2020. EIA’s updated 2021 forecast, as of May 10, is an average $2.97/gal., a 3-cent increase compared to last month’s estimate.
Economic Conditions: Transportation Rates Affect Profit
The Producer Price Index (PPI) measures cost trends for everything manufactured in the U.S. This custom performance index reflects the rate of PPI change compared to the rate of change in transportation costs.
Performance indices for Parcel, LTL and Truckload increased year-over-year and quarter-over-quarter as capacity constraints persist across all modes. Of note, costs increased 13.85% YOY for truckload. LTL increased 7.85% compared to 2020, and 9.59% compared to Q1. Parcel continues to lead all indices, climbing 5.84% since last year and 6.52% since last quarter.
Economic Conditions: E-Commerce Sales Climb Continues
Total estimated e-commerce sales for 2020 reached $791.7 billion, an increase of 32.4% from 2019.
E-commerce sales in 2020 accounted for 14% of all U.S. retail sales, which increased 3.4% in 2019.
Fourth quarter e-commerce sales reached $245.3 billion, a 23.1% increase over third quarter 2020. Year-over-year, the fourth quarter 2020 e-commerce estimate increased 32.1% compared to the same period in 2019.
Looking ahead, expect Amazon Prime Day on June 21-22 to drive an uptick in e-commerce activity, as well as a bump in small parcel volume.
U.S. Department of Commerce announces e-commerce retail sales estimates for Q1 2021 on May 18.
Transportation Industry Outlook: Q1 2021
Truckload Forecast: Freight Rate Increases Continue
- Given ongoing capacity constraints, the truckload market will see rates continue to increase for at least the first half of 2021.
- More shippers will lock in contractual transportation rates.
- Expect an uptick in tender acceptance and improved ability to move freight with primary, secondary and tertiary carriers.
- Stabilization and loosening of West Coast intermodal volume allows shippers with network visibility to seize cost savings. Expect some stabilization after the Chinese New Year.
- Capacity will improve and alleviate rate pressure following a boom in new equipment purchases.
- Working with Transportation Insight helps make you a shipper of choice to mitigate increases to transportation rates, strengthen service and improve access to capacity.
LTL Forecast: Freight Capacity Shortages, Volume Levels Increase
- Expect capacity shortages, service charges and elevated rates to continue.
- LTL volume levels will maintain or increase throughout 2021.
- Carriers continue to be selective about the new business they accept.
- Service challenges will continue in California in the foreseeable future
- Detention and storage charges have become more common.
- Shippers who continually switch carriers to improve service may find their efforts fruitless. Conversely, “shipper of choice” practices deliver rewards.
Small Parcel Forecast: Surcharges, Cost Complexity Continue
- UPS reinstated Pre-Holiday Peak Surcharges until further notice:
- UPS Ground Residential Service and UPS SurePost, as well as large packages and those that require additional handling.
- Surcharges on Ground Residential and SurePost packages will apply to any shipper that has shipped more than 25,000 packages in any single week since February 2020.
- FedEx Peak Surcharges will continue, with new rates implemented for some services until further notice:
- 75-cent SmartPost surcharge – down from $1-$2 in place for the holiday season, but higher than the 40-cent surcharge in June.
- $30 surcharge on oversized package – down from current $52.50
- Additional handling will be reduced from $4.90 to $3.
- Expect a competitive, but rational parcel shipping landscape to emerge later this year.
- Look for more parcel competitors to grab opportunities the larger carriers are overlooking. Heightened competition will benefit shippers who can optimize carrier utilization.
- Make sure you understand how carrier limitations and geographic volume/service trends affect your unique shipments.
- Coming April 11, UPS changes to zonal pricing for its Additional Handling and Large Package Surcharges.
International Forecast: Record Rates, Equipment Sparse
- International shipping demand is unseasonably high.
- Capacity is committed for much of Q1, especially up to and through the Chinese New Year.
- Equipment availability is sparse in most Asian markets.
- Expect rates to remain at record levels, even after the Chinese New Year allows the industry a chance to catch up, before looking at any stabilization.
- New federal administration might eventually bring trade compliance changes, but too early to tell how China 301 will be affected.
- Port and rail congestion are causing ripples in cost and service across domestic transportation modes.
- E-commerce demand and vaccine distribution will continue to drive capacity challenges far into 2021.
Indirect Spend Forecast: Packaging Costs Increasing
- Resin prices continue to push up with major manufacturers Dow, Chevron and Exxon Mobil announcing additional increases in January 2021. Combined with the mid-year 2020 increases, costs of poly-based packaging products are up 20-25%.
- Linerboard manufacturers pushed through a paper increase of $50 per ton in late November, driving up corrugate prices.
- The ISM Report on Business closed December at its highest reading for manufacturers in 2.5 years, with a reading of 60.7%. The New Orders Index and Production Index was above 60% for the sixth straight month.