After a period of high demand and tight capacity, shippers across most modes can expect some breathing room in 2007, with demand slowing and capacity loosening as the overall economy slows. Here are some snapshots of what logistics buyers are currently facing and what can be expected in the near future.

In a recent survey, Banc of America Securities found that 35 percent of shippers see the economy currently weakening, while 49 percent of shippers view the economy as stabilizing.

“I believe that the pressures from the softening of the economy will be good news for shippers,” Rick Jordon, director of the logistics industry group at ICG Commerce, recently told Purchasing magazine. “Outside of fuel, most costs for transportation will soften due to a slack in demand. We are entering a phase where cost structures in logistics are not aligned in terms of demand and availability. This results in less dramatic increases in prices that will make costs more level across the board.”

Here are some snapshots of what logistics buyers (and those in each transportation mode) are currently facing, and what they can expect to see in the near future.

TRUCKING
The trucking industry may see the biggest shift domestically in 2007. Trucking firms of late have seen unprecedented demand and pricing for their services. Now, in early 2007, they are reporting a decrease in demand — which is good news for shippers and freight buyers looking for more capacity and lower rates.

In a recent Bear Stearns survey, 80 percent of shippers polled reported overcapacity in truckload in Q4 2006, and 71 percent of shippers reported overcapacity in the less-than-truckload (LTL) market. Moreover, 51 percent of shippers polled expect more truckload capacity to come online in the next 12 months. The Bear Stearns report showed that shippers expect LTL rates to increase 2.3 percent by year-end, at the low end of the recent range of expectations.

The shippers’ survey from Bear Stearns showed truckload capacity loosening in late 2006. And Banc of America says softening in the housing and auto sectors, as well as a flatter-than-normal peak shipping season, are having an impact on truckload demand. The majority of shippers (55 percent) say truckload carriers are less aggressive on rates versus last year, Purchasing said of the report.

Trucking firms did a lot of equipment “pre-buying” in the second half of 2006 to beat the Environmental Protection Agency regulations that went into effect in 2007 governing truck engines and fuel. The result: a rapid increase in trucking capacity that met with an unexpected decline in demand for trucking in late 2006.

Alan Cramer, manager of supply chain logistics at Total Petrochemicals USA, told Purchasing, “In recent years, truckload capacity has been scarce but we have seen some capacity open up in 2006 and believe from our discussions with carriers that this trend will continue in 2007, at least on the lanes we use.”

Purchasing suggests buyers do the following:

• Take advantage of the market today. Trucking firms are more eager for business now than they have been in a long time.

• Use the current market environment to build stronger relationships with carriers. Don’t focus only on improved pricing — think about expanding services and collaboration with carriers.

• Do a deep dive on your carriers — understand how they manage their costs and you’ll see an improvement in your costs.

(See Purchasing magazine’s “Trucking update: Buyers see light at the end of the tunnel” and Slate’s “Dump Truck: The Mysterious Trouble in the Trucking Industry”.)

RAILROAD
According to the same Bear Stearns survey mentioned above, “rail and parcel pricing [is] expected to remain similar to 2006.” Average expectations for annual rail pricing increases of 3.5 percent for 2007 are in line with expectations a year ago at this time, the report said. Average expected domestic parcel annual rate increases in 2007 of 1 percent to 2 percent by shippers also remain in line with 2006. However, shippers recently cited that FedEx seems to be a bit more aggressive and UPS a bit more firm on pricing relative to a year ago.

Rail demand in the United States for this year should be “mixed,” according to Fitch Ratings. If demand is lower in 2007, pricing should erode, the analysts wrote. At the same time, BMO Capital Markets has said moderate fuel prices in 2007 would let rail carriers push increases in base rates.

Logistics Management reported last month:

As has been the case in the past few years, railroad freight volumes have continued to rise at unprecedented levels — as evidenced by the industry’s record-breaking 2006 performance. But the uptick in volume has also brought about capacity constraints at various junctions and corridors within the rail network, with excess capacity disappearing from many critical segments of the U.S. rail network, [Edward R. Hamberger, president and CEO of the Association of American Railroads] said… .

Indeed, ICG Commerce’s Jordon told Purchasing that the rail industry is seeing the largest pressures on pricing increases: “The increase in intermodal volume has absorbed most of the capacity for the rail companies,” he said.

And it seems safe to assume that rail capacity will continue to be strained as long as the global economies continue to export to the U.S. And if the economy continues to grow in 2007, both rail and trucking could have capacity issues as we see price increases.

“Barring a full-blown recession, however, the results of both railroads and truckers are expected to be relatively good,” according to Fitch Ratings analysts.

PORTS
According to the Bear Stearns report, shippers anticipate increased transloading. At the ports, the report said, 34 percent of shippers surveyed are transloading more freight now than they were during the past two years, while 52 percent are transloading about the same amount of freight. In the next two years, the survey indicated that 44 percent of shippers are planning more transloading compared with 15 percent planning to move more international containerized freight directly to import centers in the middle of the U.S.

“On the face of it, the current run-up in maritime shipping stocks seems to defy logic,” says Shipping-Exchange.com. “Many top players have been struggling financially amid a drop in daily charter rates.” Yet shares of maritime shippers “have never been more robust.”

Trade with China continues to fuel demand for both container and bulk ocean freight heading into the second quarter, Purchasing reported last month. According to a recent Bloomberg report, China’s exports rose 27 percent last year while imports climbed 20 percent, “all of which translates into a lot of ocean freight in and out of the country.”

“Freight [demand] is climbing so high in China because demand for commodities is not falling despite high prices,” Purchasing quoted Helen Henton, head of commodity research at Standard Chartered Bank, as having said.

The demand trends have had an impact on ocean freight rates, which were at one point in mid-2006 leveling and dropping depending on type of freight.

“There is no reason [ocean rates] can’t go up 20 percent or conversely down 20 percent” in the short-term, said James Hall of Galbraith’s ship consultancy in London in a recent Reuters report (via TMCNet). Hall said rates could only hit record peaks for a short period before the enormous cost would slow demand.

Global container demand is forecast to reach 490 million 20-foot-equivalent units (TEU) by 2009, according to Abdulla Bin Damithan, DP World deputy director commercial, in a Logistics Today report earlier this year.

Meanwhile, with the so-called “slow season” officially over for U.S.-based retail container ports as of last month, traffic is on the rise and is expected to break an all-time record in July, according to the monthly Port Tracker Report by the National Retail Federation, a retail trade association, and Global Insight, a provider of economic and financial information. Monthly container volumes are predicted to grow each month from now through the summer, and if predictions hold true, July’s all-time volume record will be followed by another record in August. Forecast is a volume of 1.55 million TEU for July, which would be up 11.4 percent from July 2006, and 1.59 million TEU for August, a 6.7 percent increase year over year.

“Despite the volume, U.S. ports are operating without congestion and there is adequate truck and rail capacity to handle the incoming cargo,” Logistics Today quoted Paul Bingham, economist at Global Insight, as having said.

In fact, in the U.S. — which is second in world maritime container traffic, according to a report released by the Bureau of Transportation Statistics in March (via Bloomberg) — congestion continues to plague the larger West Coast ports.

AIR CARGO
Demand for global air freight continues to be strong, “fueled by increased demand from Asia both on the inbound and outbound side,” according to Purchasing magazine. The Air Transport Association (ATA) says air cargo-ton miles increased 6.4 percent in 2006, up from 3.8 percent growth the year before.

Most recent figures for international air cargo, from the International Air Transport Association (IATA), show growth of 2.4 percent for February 2007 after January’s increase of 3 percent year over year. Earlier last month, the IATA raised its estimates for global airline profits — combining both freight and passenger figures — to $3.8 billion. For all of 2007, IATA projects revenues to grow 4.4 percent year over year, to $469 billion. Included is a jump of 3.7 percent in cargo revenues to $456 billion and passenger revenues of $375 billion, a climb of 4.7 percent. Looking to 2008, Logistics Today recently noted, the association sees net industry profits climbing to $7.6 billion.

Purchasing reports:

Carriers are rapidly increasing their investments in equipment and infrastructure to meet the increased demand of global shippers. The Airports Council International (ACI) predicts global air freight will triple by 2025, fueled by growth in Asia.

ACMG’s International Air Freight and Express Industry Performance Analysis shows that airlines in China are increasing their interest in the air freight market.

North America — which in 2006 was the largest region in the world for freight (with 35 percent share) — is likely to grow more slowly than in the other geographic regions, averaging 4.4 percent over the next two decades. It is expected to be surpassed by Asia within 20 years.

Bear Stearns found that 39 percent of shippers polled expect to pay more (excluding fuel surcharges) for international heavy air freight shipments in 2007, while 20 percent say their air freight rates will decrease in 2007. The majority of those predicting decreases (14 percent) expect less than a 5 percent dip.

With all modes of shipping, it will be energy costs, of course, that will be the big question mark of the year and likely for years to come.

See also:

ThomasNet Aerospace (beta)

Global Logistics Solutions: A Guide to the Problems Shippers Face
by Andrea MacDonald
World Trade Magazine, May 1, 2007

2007 Logistics Rate Outlook: Opportunity Knocks
by Elizabeth Baatz
Logistics Management, Jan. 1, 2007

Trucking update: Buyers see light at the end of the tunnel
by David Hannon
Purchasing, April 5, 2007

Dump Truck: The mysterious trouble in the trucking industry
by Daniel Gross
Slate, Feb. 2, 2007

Global Transportation Management Trends
by Theodore Stank, Thomas Goldsby, Michael Crum, Joel Sutherland
IndustryWeek, March 7, 2007

Tips to Save On Logistics Cost
by Paras Yadev
Shipping-Exchange.com, Feb. 5, 2007

Resources

Ocean freight rates and demand remain stubbornly high
Purchasing, April 19, 2007

Logistics market will give buyers a breather in 2007
by David Hannon
Purchasing, Jan. 18, 2007

Fourth-Quarter 2006 Shippers Survey Results Airfreight & Surface Transportation
Bear Sterns, 2007

AAR says major freight railroads to spend $9.4 billion on improvements in 2007
by Jeff Berman
Logistics Management, April 24, 2007

Railroads Welcome House Introduction of Rail Freight Infrastructure Act
by Edward Hamberger
American Association of Railroads, May 3, 2007

Ocean Shipping Companies Ride Rising Tide To All-Time Highs
Shipping-Exchange.com, April 25, 2007

Growth Continues For Ocean Lines
Logistics Today, Feb. 9, 2007

Traffic Begins to Pick Up at Retail Ports
Logistics Today, April 12, 2007

America’s Container Ports: Delivering the Goods
U.S. Bureau of Transportation Statistics, March 2007

Mitsubishi, Dole Fuel Boom at Small West Coast Ports
by Vivien Lou Chen
Bloomberg, March 9, 2007

Shippers leverage air cargo as global sourcing extends supply
by David Hannon
Purchasing, 2007

Global Air Cargo Up Slightly, Profits Prediction Raised
Logistics Today, April 12, 2007

Transportation Intelligence reports strong freight forwarder performance in new report
Logistics Management, April 17, 2007