IOS List - The freight and trucking super-edition.
We breakdown all the stats and news on logistics and how it will impact IOS.
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Today, we are diving deep on freight and trucking. Without these pillars, there is no IOS industry (or 2 hour Amazon deliveries). They are the absolute backbone of the country’s crippling consumer addiction economy. And now, they are faltering. Let’s peer inside the chain and see what we learn.
First, we will scare you to death and then provide relief with an interesting counterpoint about IOS being recession-tolerant. Hat tip to Jimmy Ullrich of Colliers for helping us finish on a high note!
The bullwhip effect is this idea where you have these small changes, or sometimes large changes in customer demand. And that sort of ripples through the rest of the supply chain. If you think back to the pandemic, there was an expectation that people weren't going to buy anything. And so we had a lot of retailers and manufacturers who cut back. But in actuality, people who were stuck at home did end up buying quite a lot. And so everyone had to scramble to get things to them. So to produce the goods that people actually wanted at that time, we saw inventories start to build up. And now there's the question of whether we're seeing all of this go into reverse.
Outbound Tender Rejection Index (OTRI): and index that measures the percentage of trucking loads that are rejected. OTRI is influenced by trucking capacity, consumer and producer goods ordered, and the offered pricing for moving cargo.
A high rejection rate means that trucking firms have a lot of discretion on what loads they will take. Carriers want a high rejection rate. A low rejection rate means that carriers have few loads to pick up and are taking almost any load, without consideration of destination or price.
Last week, tender rejections dropped to an all-time low of 2.53%. The previous record low was set during the extreme COVID lockdowns at 2.57%:
What fixes this? We need to shed drivers and carriers to get the market balanced. Unfortunately:
During COVID peak cycle, solo trucking operators were earning $4 a mile ($3.20 net of fuel). At 2,000 miles a week, that is $350k to $400k per year without a formal education. Low barriers to entry to get in. No tenure requirement. So they bought trucks for $150,000. Now they earn $1.56 a mile net of fuel and the interest rates on their vehicle loans have doubled. They weren’t prepared for a downside scenario.
Freight shipments are back down to 2019 levels. The COVID spike is gone:
Another thing that’s challenging volumes now is these massive floods in California that is throwing off the harvest season. Typically it was late March, early April, when we start picking lettuce, strawberries, but those fields were so flooded that people couldn’t get in to pick the crops. This is particularly tough for operators of refrigerated trucks that are now idle and would normally be active.
The entire COVID spike is in the rearview. Check out how precipitously the freight rates drop once the supply chain issues cleared up and Powell started hiking interest rates on the back half of 2022 to stifle demand:
Global Container Freight Rates 2019-2023
In 2022, as the global trade recession began to take hold, there was much anticipation that ocean container demand would surge once China ended its COVID-related restrictions and lockdown measures. However, this hype has since faded, and what was once hoped to be a much-needed boost to volumes now looks more and more like a disappointment.
FreightWaves SONAR data shows that the Inbound Ocean TEUs Volume Index – USA, which measures the total ocean container volume departing all global origins bound for U.S. ports based on the vessel departure date, has been on a downward trend since the beginning of the year. In fact, as of May 21, 2023, the index is down nearly 10% from its peak in December 2021.
There are a number of factors that have contributed to this decline, including the ongoing war in Ukraine, rising inflation, and supply chain disruptions. However, it is clear that the lack of a significant boost in ocean container demand from China has been a major factor.
China to US Container Volume
The Chinese government's COVID-related restrictions and lockdown measures have had a significant impact on the country's economy, and this has led to a slowdown in exports. In addition, the war in Ukraine has disrupted global trade flows, and this has also contributed to the decline in ocean container demand.
As a result of these factors, it is now clear that the hype surrounding the potential boost to ocean container demand from China's reopening has been unfounded. The reality is that the global trade recession is likely to continue for some time, and this will continue to weigh on ocean container demand.
US Port Volumes Move East
Fuhgeddaboutdit, Newark port volumes are surging like the guitar solos at a Bon Jovi concert. The west coast ports are still reeling from COVID logjams and labor issues.
The Port of Los Angeles needs to replace a labor contract that expired on July 1, 2022. As of this writing, no deal. Port exec Gene Seroka acknowledge the lack of a deal is affecting imports and pushing cargo to East and Gulf Coast ports and “some of that cargo may be lost for good.”
I am optimistic that we will hear good news soon. We are on the doorstep of a labor agreement.
Optimism about a labor deal at the Port of LA? The Port of Los Angeles is expecting a better second half of 2023, but volumes are still expected to be significantly below 2022 levels. The port's volume so far in 2023 is down 25% from the record levels of 2022. The port desperately needs to reach a deal soon to win back volumes from east coast ports that are eating LA’s lunch. The port is using the current “quiet” period to strengthen systems and address challenges, such as California's new emissions regulations.
Despite Lower Volumes Nationwide, East Coast Ports Still Taking Share from LA:
Competing ports in the East and Gulf Coast have received more than $11 billion in federal investment since 2010 versus $1.2 billion for the West Coast. Picking winners? Or is it a battle of business friendly states versus over-regulation?
THE OPTIMISTIC COUNTER POINT
IOS specialist Jimmy Ullrich with Colliers wrote a recent piece on IOS as a counter-cyclical asset class. Looking beyond the trucking users, Jimmy highlights the overall diversity of IOS users. He makes some great points:
The IOS tenant base is actually quite diverse, extending beyond just trucking. Tenants include equipment rental, roofing supply, plumbing supply, modular buildings, lumber yards, pipe yards, infrastructure supply, contractor yard, automotive storage, auction sites, and more. Even in the event of a freight recession, there are still plenty of tenants vying for limited supply sites, such as equipment rental businesses and building materials suppliers.
Not all IOS is trucking terminals.
To read the full piece click here: LINK
Some IOS tenants, like modular building companies such as Williams Scotsman, actually see an increase in demand for storage during a recession as buildings are shipped back from their locations. Similarly, roofing supply houses like Beacon have a relatively stable demand profile over time with their space needs tied to the existing supply of roofs rather than new construction.
Jimmy Ullrich, Colliers
Jimmy is all smiles about the prospects for IOS. Reach out at [email protected].