Constant shifts in supply and demand are hallmarks of the logistics industry. From measuring the number of trucks on the roads or the volume of freight moving through the US, objects as tiny as semiconductor chips or world events as big as a global pandemic have significant impacts on supply and demand. With so much uncertainty and constant ups and downs, it can be difficult to predict what will happen next in the industry.
Over the past three years, supply chains have weathered a number of challenges related to the pandemic, including a surge in consumer demand, a shortage of new trucks and skyrocketing freight rates. In 2022, however, spending on physical goods began to level off as consumers returned to spending on experiences and excursions. Big shippers started pulling cargo out of the spot market by contracting with shippers, and diesel prices took a hit Record high of $5.75 a gallon in June. Too many trucks and insufficient spot freight led to falling spot prices, with national dry van prices plummeting $3.10 per mile in January to $2.38 per mile in November. As prices fell and fuel costs rose, the problem of running on old, overpriced equipment became apparent. The higher cost of running a truck with rapidly falling freight rates quickly resulted in an unsustainable business model. Many new owner/operators joined with larger fleets to control costs and stabilize their revenues.
Looking ahead to the year ahead and beyond, here are the four most important logistics industry forecasts for 2023.
Demand for new trucks will remain stable; Used car prices will go down. In 2023, the demand for new trucks will remain stable even with uncertainties in the market. There is catching up to do with large fleets that have not been able to replace their aging equipment in the last two years and will buy the bulk of the new equipment. This will flood the used equipment market with trucks and drive prices down significantly. Additionally, some of the price drop will be due to the number of bank repossessions, foreclosures and liquidation sales of trucks being sold at auction.
Freight rates will fall to almost pre-pandemic levels. The supply chain bottleneck that brought the global supply chain to a standstill is now virtually non-existent save for a few key drivers and markets and these should go away in Q1 2023. Goods purchased and shipped at higher prices are likely to be sold before the first quarter of 2023 and the downstream impact of dramatically lower shipping costs should be felt in 2023. This means that freight rates will drop to almost pre-pandemic levels. Due to the continued impact of inflation, interest rates will not fully return to 2019 levels, although they are falling rapidly now. For example the Freighto’s Global Container Index shows rates of $1,400 in early 2020, with little change in previous years through 2017. Container rates peaked at over $11,000 in September 2021 but have fallen by over 80% to just over $2,100. The current statewide dry truck rate of $2.38 per mile is just 45 cents below the average of $1.93 per mile in December 2019, but the price per gallon of diesel was then just $3.06 compared to 4.98 dollars today. The difference represents 35 cents per mile higher cost to drive a truck averaging 5.5 miles per gallon. As diesel prices and truck demand continue to fall, freight rates will also fall.
Shippers will continue to divert to Gulf and East Coast ports. Although total container volume is still high compared to historical numbers, since September it is down 21% year-on-year Port congestion is no longer a problem. However, shippers will likely continue to divert containers, which will cause the ports of Los Angeles and Long Beach to lose market share. This is due to the higher cost of moving freight overland, ongoing industrial disputes with dockers and rail workers’ unions creating insecurity. Shippers are now seeing that the cost savings associated with more miles on the ocean to get closer to their final destination are worth the extra time it takes to do so. Nearshoring to Mexico and South America and diversifying sourcing away from China will also reduce Southern California ports’ market share. In addition, there is a potential impact of California’s Assembly Bill 5, which determines whether workers are employees or independent contractors.
More trucking companies will cease operations than in 2019. In 2019, we saw trucking companies shut down operations as a direct result of overly aggressive fleet expansion during the 2018 truck boom. Given that the 2020-2021 boom dwarfs 2018 numbers, the result is Bankruptcies, closures and liquidations will likely be larger as well. The main factor behind the failure of most carriers is falling freight rates, making it impossible to be profitable with higher operating costs.
When will the freight market recover? The most optimistic prediction would be a recovery from Q2 2023, but this entirely depends on a best-case scenario for a broader US recession. The almighty consumer will be the biggest factor in how much freight is available in 2023, so a severe recession leading to lower spending on consumer goods amid a weak labor market would be disastrous for all small and medium-sized trucking companies. If the broader economy experiences a “soft landing” and begins to recover next year, freight rates will likely bottom out in the first quarter and remain flat until seasonal freight volumes pick up in the second quarter and slowly increase over the following two quarters.
Matt Lawrence is Chief Executive Officer of Fox logistics.
