Top Five Freight Stories, June 26, 2016

Health of US freight growth hinges on pace of inventory destocking (Journal of Commerce, June 21, 2016) The Council of Supply Chain Management Professionals (I’m a new member) released its annual 2016 State of Logistics Report, produced by A.T. Kearney.  The report shows some hopeful signs that the levels of inventory may be drawing down, or at least not growing so much.  Since the 2008 recession (during which overall US business logistics costs decreased from 8.59% of nominal GDP in 2007 to 7.85% in 2015), inventories increased 5.4% a year through 2014, and have flattened a bit last year.  Inventory carrying costs are rising even though warehouse space is cheap, as financial costs are up 7.4% and insurance and obsolescence costs are up 5.1%.  Sean Monahan with A.T. Kearney, said “Hopefully, as organizations become less siloed, and more cross functional in decision-making, we’ll see inventories become more manageable and drop to that low 13% of GDP range again.”  That adjustment may take time, as Rick Camacho, vice president of global supply chain operations at Hershey Co. said at the National Press Club announcement of the report.  “When things slow down it takes time to adjust, and at the same time when the economy picks up companies still try to be efficient and burn off inventories,” he said. “The supply chain is a big ship and it takes a long time to slow it down and a long time to get it moving again."

DOT begins audit this month to assess impact of truck cargo delays (DC Velocity, June 16, 2016).  The FAST Act required the Department’s Office of Inspector General to report on the impacts of delays in the loading and unloading of cargo at shippers, delays which affect commercial truck drivers’ hours of service compliance and pay.  The OIG will be identifying data on loading/unloading delays and provide measurements of these delays on trucking companies and on the economy as a whole.  The Owner-Operator Independent Drivers Association welcomes the report, according to a statement.  They hope to help “evaluate what we have known to be true for far too long: excessive wait times during the loading and unloading process have a negative impact on safety, cost society billions, and are part of the reason why the industry experiences high driver turnover rates."  The Federal Motor Carrier Safety Administration is supposed to issue regulations to collect data on loading/unloading delays.  Driver detention was a big deal to former FMCSA Administrator Anne S. Ferro, who said, “Drivers have among the toughest jobs in our nation.  They operate under very difficult conditions, they operate under extreme stress and they operate, frankly, in some cases with extreme disrespect when it comes to detention time and poor compensation.”

 The Panama Canal Expands (Wall Street Journal, June 20, 2016).  The Journal runs a long, graphics-rich explanation of the opening of the canal that happens today, June 26, culminating a nine-year, $5.4 billion expansion which doubles the canal’s capacity.  It opens at a time when overall trade volumes are depressed, particularly for container shipping lines.  But the canal may allow LNG tankers to take advantage of expanded access to Asian markets for competitively priced US energy exports.  East Coast ports are eager to expand their capacity to attract the new bigger ships.  The Port Authority of New York and New Jersey will be unable to accommodate the bigger container ships until a project to raise the Bayonne Bridge is complete, a project that has been delayed by design issues and bad weather.  Marc Bourdon, US operations head for France’s CMA CGM Group, says if New York isn’t ready, other ports won’t attract the ships either.  “With the Panama Canal opening, I think you’ll see some…slightly larger vessels coming through, but not the biggest ones,” Mr. Bourdon said. “You need New York to take them. It’s the major port. None of the other ports along the coast would be able to sustain a vessel of that size.”  Businesses in South Carolina would disagree.  The Port of Charleston is dredging its harbor to be among the deepest along the East Coast, and on-dock rail service sends containers to upstate Greer, SC (near Greenville-Spartanburg). Over six million square feet of warehousing space is under construction in South Carolina in anticipation of new economic activity made possible by container traffic from Europe and from Asia.  “The Panama Canal is not even completed, the port dredging has not been completed, but we’re already attracting major distribution and manufacturing companies,” said  Trey Pennington, an industrial real-estate broker with CBRE in Greenville. “The Panama Canal will fundamentally change the market dynamics of South Carolina in the coming years.”

 Freight Market Bracing for Summer Slump (Wall Street Journal, June 20, 2016).  Did we just mention slumping freight activity? The Cass Freight index, which measures freight activity by tracking shipper-carrier transactions, dropped big time instead of rising in advance of peak shipping season.  The index rose just 1.3% in May, down 5.8% from a year earlier.  Rosalyn Wilson, now founder and president of Freight Matters, a supply chain consultancy, authored the monthly report, and said, “We have failed to see the robust growth in shipments that we expect to see this time of year.”  The declining freight demand led publicly traded trucking firms to reduce earnings expectations for the second quarter of 2016.  Werner Enterprises lowered its earnings targets to $0.21 to $0.25 per share, down from analysts’ expectations of $0.40 per share; Covenant Transportation Group lowered its outlook from $0.28 to $0.33 per share to $0.17 to $0.23 per share.  Celedon Group’s stock dropped 9%, Swift Transportation shares fell 4.3% and Knight Transportation shares were down 4.3%.  Derek Leathers, Werner’s CEO, warned that shippers were exacting significant rate reductions during contract negotiations.  “We’ve seen shipper negotiations that have demanded in excess of 10% in rate reductions,” Mr. Leathers said. “They’re essentially asking folks to operate their business at a loss. Carriers will do that for a period of time, but there are negative long-term outcomes to that.”

 Grain gain helps offset coal and crude crash (Railway Age, June 22, 2016).  Weekly rail traffic reports from the Association of American Railroads have been universally dismal this year.  The week ending June 18, 2016 also saw lower volumes:  total units down 6.3% year over year, carloads down 8.5%, and containers and trailers down 4.2%.  Year to date, total combined carload and intermodal traffic were down 8% compared to last year. One piece of helpful news amidst the gloom:  grain carloads were up 24.3% year over year.