Logistics Industry in Flux: Navigating Challenges of Rising Ocean Freight Rates and Weak Trucking Market

Where we are today and what lies ahead in the world of logistics  

The Supply Chain Logistics team at PwC US closely monitors US logistics market conditions to assist stakeholders in responding to evolving trends and planning for contingencies. This analysis reveals the impact of rising maritime costs, causes and implications of a bear trucking market, and additional events with the expectation for large impact on the industry. 

Logistics Industry in Flux: Navigating Challenges of Rising Ocean Freight Rates and Weak Trucking Market 

Ocean freight rates double 

The cost of maritime shipping for a 40-foot container has seen a sharp rise, escalating from $2,706 to $4,226 [1], marking a 56% increase from April to May 2024. This is primarily due to continued diversion in the Red Sea, which has escalated as of late. Recent attacks on maritime vessels in the Red Sea and Gulf of Aden resulted in the sinking of the Greek-owned Tutor coal carrier. Due to these diversions, the Asia-Europe routes are estimated to need 15-20% more vessels than in normal circumstances to maintain adequate service levels. The carriers are unable to provide this capacity, which is resulting in operational blank sailings. Other factors impacting the rise in ocean freight are the GRI implemented by various carriers in May and congestion across Mediterranean ports. This hike in ocean freight costs, recent ocean freight disruptions and boom in e-commerce is likely to continue to bolster the demand for air freight, which has already witnessed a 12% year-on-year growth in May. Given that a significant part of world’s cargo moves through ocean, even a slight shift in mode can drive up the Air freight volume. Shippers should stick to contract rates as much as possible and refine planning to help avoid unpredictable spot rates. 

Seasonal impact on trucking market 

The van load-to-truck ratio increased by 0.85 to 4.39 in May, driven by seasonal trends like fresh produce and retail goods movement [2]. This surge, reflected in a 4% rise in the DAT Truck Volume Index [3], is temporary due to factors such as road check inspections and the US Memorial Day holiday. Furthermore, carrier attrition is creating additional pressure on capacity, contributing to a higher van load-to-truck ratio. But, over the past year, van rates have remained flat suggesting a continued overall weakness in the market. The stagnation of both dry van truckload (TL) spot and contract rates points to the persistence of a bear market, with no immediate signs of a shift to a bull market. To trigger such a shift, a targeted catalyst for rate increases such as produce would need to see a significant increase in volume; however, this is unlikely as the United States Department of Agriculture (USDA) reported that May volumes were below the levels of the previous three years [5]. Carriers are proactively responding to the situation by reducing their fleet size through parking and selling trucks, aiming to align supply more closely with demand and stabilize pricing in the forthcoming months. 

Logistics Monitor Index (LMI) expansion 

The Logistics Managers' Index (LMI) for May stands at 55.6 [1], which is an increase of  2.7 points from April, indicating expansion in the logistics industry. Notably, transportation prices have seen a significant rise, jumping from 44.1 points in April to 57.8 points in May. This surge is likely linked to increased ocean freight activity and a rise in import volumes to the west coast, reflecting the overall expansion in the logistics industry. To address the impact of these escalating transportation prices, it is recommended that shippers should focus on carrier relationships to secure contract rates and avoid the unpredictability and often high costs associated with spot market.  

Additionally, warehousing utilization has increased by 8.9 points despite a decrease in inventory levels (-4.5 points), suggesting that the rise in utilization is due more to increased demand than restricted supply, unlike the previous year[1]. At the forefront of this trend is the popularity of e-Commerce and the growing need for quick and reliable order fulfillment. As a result, companies are expanding the number of warehouses to enhance service levels and meet customer needs. Companies may need to adapt their warehousing strategies and optimize inventory control. This can involve exploring various advanced technologies, such as automated inventory management systems, data analytics, and artificial intelligence, especially when dealing with lower inventory levels. 

 Other developments in May 

High interest, low investments: Impact of the Federal Reserve’s stagnant rates 

The Purchasing Managers' Index (PMI) has been on a downward trajectory since late March when it peaked at 50.4% — the highest since October 2022. As of May, the PMI has dipped to 48.7% [1], signaling a contraction within the industry. This downturn is attributed to a combination of factors: a drop in demand and new orders, coupled with the prevailing uncertainty surrounding interest rates, prompting companies to prioritize liquidity and adopt a conservative stance on investments. Due to the manufacturing slowdown, a ripple effect may be seen in the transportation and logistics sectors, potentially leading to reduced demand for their services. This situation is due to companies postponing new orders and holding back on expanding their capacity. It is crucial for businesses within the logistics and transportation industry to keep a close watch on the manufacturing sector's trends and tailor their strategies to help cushion the impact of this deceleration. 

Calm before the storm: NOAA releases most aggressive hurricane forecast on record 

The National Oceanic and Atmospheric Administration (NOAA) has issued a forecast for an above-normal Atlantic hurricane season in 2024, predicting a range of 17 to 25 total named storms, with eight to 13 hurricanes, and four to seven major hurricanes [4]. This is considered the most aggressive forecast on record, with significant implications for transportation and logistics. Hurricanes are expected to disrupt all modes of transportation, leading to delays, damages, and increased costs. It is crucial for freighters to have contingency plans in place to help mitigate the impact of hurricanes on their operations through rerouting strategies and proactive decision making. 

What does the future look like? 

The potential strike by dockworkers at East Coast and Gulf Coast seaports in the US is a significant development that could disrupt supply chain and logistics operations at major trade gateways. Union organizations have raised concerns about the deployment of automated machinery, arguing that it breaches existing labor agreements. The breakdown of labor negotiations has heightened the risk of a strike, potentially leading to revisions in labor practices and the integration of automation technologies in the industry. 

Sources:  

1. FreightWaves SONAR Platform (June 15, 2024) https://sonar.freightwaves.com/ 

2. DAT (June 15, 2024), Van Load to Truck Ratio, https://www.dat.com/trendlines/van/demand-and-capacity 

3. DAT (June 18, 2024), Truckload Volume Index, https://www.dat.com/company/news-events/news-releases/dat-truckload-spot-rates-gained-in-may-on-robust-van-and-reefer-volumes 

4. National Oceanic and Atmospheric Administration (May 23, 2024) https://www.noaa.gov/news-release/noaa-predicts-above-normal-2024-atlantic-hurricane-season 

5. E2open Road Freight Market Index Report (June 2024)  

 Contacts:  

Bryan Gross, Principal 

1 612-979-3902 

Minneapolis, MN 

Brett Cayot, Principal 

1 312-371-5559 

Denver, CO 

Sean Centilli, Director 

1 616-890-9475 

Grand Rapids, MI 

© 2024 PwC US. All rights reserved. PwC US refers to the US group of member firms, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general purposes only, and should not be used as a substitute for consultation with professional advisors.