The rail intermodal industry is having “a heck of a year,” says Larry Gross, president of Gross Transportation Industry, with volumes up both because of strong movement of cargo in international containers and because of shippers facing a shortage of trucking capacity.
A leading analyst of the intermodal industry, Gross noted that a year ago he thought the intermodal industry would see volumes grow 4.2 percent in 2018, but that instead they were up 6.8 percent in the first seven months of the year.
He said he expects 2019 to be “a more challenging year for intermodal” sales because of less growth in demand by international shippers. He also said the driver shortage may ease.
Speaking Monday at the annual expo of the Intermodal Association of North America (IANA) in Long Beach, Calif., Gross said much of the increase in intermodal volume in 2018 has been driven by strong international volume. He had forecast international volume would be up 2.5 percent in 2018, but instead it is up 6 percent through the end of July.
He said there is still a question as to how much of the volume growth this year is a result of shippers moving cargo early in response to concerns about congestion in North America or to avoid tariffs.
“I’m very interested to see what happens when the August numbers come out. Preliminary indications are that we are beginning to see a ‘dial-back’ in terms of the growth in international,” he added.
Domestic intermodal volumes, which Gross had predicted would rise 5.8 percent this year, are instead up 7.6 percent in the first seven months. That strength is not the result of domestic container volumes, which he said are up 6.1 percent in the first seven months, but from a strong increase in the number of trailers being moved by railroads on flat cars.
“The trailer side is on fire,” he said, with volumes up 16.3 percent through July. Gross had predicted only a 3.5 percent increase in trailer-on-flat-car moves this year.
He said trailers are being used as a “safety valve” because domestic container volume growth has been limited since the fourth quarter of 2017.
Looking more closely at the piggyback market, he said moves of shorter trailers that are 48 feet or less are up 8.3 percent, which he attributes, at least in part, to growth in e-commerce.
But he said growth in moves of 53-foot containers is “on fire,” up 19.8 percent this year through July.
“The 53-foot trailer has definitely been a safety valve for folks that are looking for intermodal capacity but have not been able to find a domestic container,” he said.
Movement of temperature-controlled trailers is also on the rise, Gross said.
Gross said his research has found a big disparity between how productively domestic intermodal containers are being used when the privately owned and rail-owned fleets are compared.
Looking at the private fleet, which he said represents about two-thirds of the domestic fleet, he said “revenue moves per working day” were 11 percent higher in July than they were on average in 2016. But the increase is just 1 percent for the rail-owned fleet.
“In two years we have not seen any growth in the productivity or work being accomplished” by the rail-owned fleet even though equipment has been added, Gross said. “It’s just an indication of the reduced velocity and some of the other issues that we are seeing on the service side have conspired to bring overall growth down to a very small level.”
Average intermodal train speed is currently about 29 miles per hour, which he said is about 1 mph slower than it was a year ago and 1.5 mph lower than the five-year average.
“The system is having some difficulty digesting some of this growth and that is one of the things that has impeded velocity,” said Gross.
Bill Strauss, a senior economist and economic adviser at the Federal Reserve Bank of Chicago, told IANA Expo attendees that the U.S. economy is in the 10th year of an economic expansion that began in 2009, though growth has been at a “tortoise-like pace,” averaging 2.3 percent.
He said economic activity has ticked up in 2018, with the latest Fed view in June that real GDP would increase about 2.9 percent this year.
But Strauss cautioned the U.S. economy is coming off a “sugar high” resulting from last year’s tax cuts and noted that the Fed projected that in 2019 annual GDP growth would drop to 2.3 percent. He noted if the economy is still growing through next July, the expansion will have set a new record in terms of length.
Most of the risk to the U.S. economy comes from abroad, said Strauss, pointing out that problems in Asia or Europe related to Brexit or the Italian or Greek economies might impact the United States.
While “all the talk about trade and tariffs” has given him some pause with regard to the economic risk, his view was that they did not rise to a level where the country has to worry about entering into a recession.
Lars Jensen, chief executive officer of SeaIntelligence Consulting, noted ocean carriers operating in the transpacific trade are enjoying a strong peak season.
This summer carriers have so much demand to move cargo from Asia to the U.S. that container shipments are not being loaded on the ships on which they have been booked, but are being “rolled” to later voyages.
But Jensen said capacity, not demand, is the driver of the outlook for the shipping industry next year. “We still globally have significant overcapacity that has built up over several years.”
Even under an optimistic scenario, he said it will be 2021 before global demand and global supply will be in balance.
Jensen said strong demand in the transpacific may be a temporary phenomenon driven by shippers moving cargo earlier in an effort to escape proposed U.S. tariffs. But he said if it turns out that the heavy volumes are a result of strong underlying demand, then carriers have ample opportunity to transfer more capacity into the transpacific.
“The reality is that freight rates are dropping like a stone on most other trades globally,” Jensen said.
He also noted that most of the new ship capacity being added to the container fleet is in ultra-large containerships with capacity of more than 18,000 TEUs. By default, those ships will go into the Asia-Europe trade, and the vessels they displace will likely cascade into the transpacific.
Jensen cautioned that as those bigger ships come into service, he expects the number of weekly services from Asia to the United States will be reduced.
He predicted that 2019 will be used as a “warm-up period” to prepare shippers for the higher cost of bunker fuel that is expected when ships are required by an International Maritime Organization agreement to use low-sulfur fuel beginning in 2020.
On Monday, Maersk rolled out a new bunker adjustment formula surcharge that it said “is designed to recover increases in fuel-related costs” and will be charged separately from Maersk Line’s freight rate.
Maersk estimates that 90 percent of the container industry will have to utilize more expensive low-sulfur fuel in order to comply with the IMO requirement and that will increase the cost of fuel for the container shipping industry by some $15 billion and for Maersk itself by $2 billion.
Jensen pointed to a study by the consultants McKinsey & Co. that estimated the ocean carriers have collectively lost more than $100 billion over the past 20 years and will have no choice but to pass those higher fuel costs along.
Once there is a better balance of supply and demand in the container industry, Jensen said he expects carriers will use the new consolidated structure, which has grouped major carriers into just three alliances, to become profitable again.
With higher freight rates and tight capacity in the trucking industry caused by a shortage of drivers, David Ross, a managing director for equity research in global transportation and logistics at the investment bank Stifel, said he did not see the outlook changing unless pay increases substantially.
He said the public companies that Stifel follows have 5 percent to 10 percent of their fleets “up against the fence because they can’t find drivers.”
Even Walmart, which he said pays truckers nearly $90,000 a year, “can’t figure out what to do about driver recruiting and retention,” he said, noting that the nation’s biggest retailer last week launched a program to recruit drivers for its private fleet.
And it’s not just drivers that are in short supply. Ross said there is low unemployment among drivers, middle management, sales and warehouse workers employed by trucking firms.
Ross also noted the workforce is graying. Two decades ago it was said roughly a third of drivers were under age 35, a third were 35 to 50 and another third were older than 50. He said those age brackets have been “shifted up 10 years.”
Some younger workers may be scared away from the industry because of all the talk about autonomous trucking, fearful that they would lose their jobs in few years.
Even though driver pay has risen 10 percent to 15 percent in the past year, Ross said it may take an additional 20 percent to 30 percent pay increase to attract people to the industry.