Will the New Administration Affect Freight Rates?

We find ourselves two weeks into a new presidential administration that has promised radical change and a total departure from how things have operated over the last eight years. One of the most talked about policy areas, and potentially one of the most impactful, has been global trade. How will the new administration change the current trade landscape and what will the result be for businesses and consumers?

With supply chain costs being significant for most businesses, big changes in trade policy can have an effect on almost everyone. Modifications to laws and regulations will result in fluctuations to demand and capacity that will drive the freight market. What remains to be seen is if they will drive shipper’s costs up or down.

Outlook on Rates by Mode:

Ground

With US economic activity on the rise, the outlook for the ground transportation industry in 2017 is positive.  A focus on lowering taxes and investing in US infrastructure should lead to an increase in demand for domestic shipments.  Industry experts predict modest freight market growth.

Gradual capacity tightening, slight increases in freight pricing, higher demand and stronger freight volumes are expected to characterize the market, at least through mid-2017. It is anticipated that truck rate increases in 2017 won’t be steep, but shippers should begin to discuss pricing during the first quarter, in order to avoid expected rate hikes. If truck rates do increase, rail may become a more attractive option for shippers.

Uncertainty surrounds market conditions in the second half of the year, due to regulatory and political administration changes. With the Federal Motor Carrier Safety Administration issuing the ELD mandate, effective December 2017, making it a mandatory requirement for truck drivers to utilize electronic logging devices in lieu of paper logbooks, the end of the year could result in a reduced number of available drivers, a loss in utilization and productivity resulting in a capacity crunch, and increased costs for shippers. In addition, the ongoing driver shortage is another issue that could affect truck capacity and rates in 2017.

Ocean

We are coming off an unprecedented seven years of decline in ocean market rates. Since 2010, year after year, there was deflation in ocean rates. Experts predict that 2017 will be different, and we should see an increase. Shippers with Trans-Pacific ocean contracts as well as Asia-Europe ocean contracts have reported in January 2017 that their fixed rates went up. The historically low rates impacted the shipping lines’ profitability and resulted in bankruptcies as well as mergers & acquisitions: Hanjin went bankrupt, mergers of three Japanese liners happened, etc. The container lines feel they need to get rates to a sustainable level.

Air

The new administration’s plans to cut taxes and reduce trade regulations has most speculating that there will be some growth for the air industry.  However, despite the prospects of higher volume during Q4, less than half of the air freight capacity is currently being utilized. As a result we are still seeing overcapacity and competitive pricing.  IATA forecasts strong growth at 3.5 percent in 2017 reinforced by confidence in the new US administration’s promise to cut taxes. It is difficult to determine what the long term outlook is, but with Asia showing volumes growing at around 10 percent in December the outlook for the airfreight industry is positive.

Outlook

2017 will be a year of change and it is not yet certain what the long-term impact of these changes might be. Still up in the air are possible duty rate increases, cancellation or addition of free trade agreements and other regulations that would greatly impact the number of international shipments. While most in the US are anticipating an increase in demand, how much depends on what the administration can get done. Confidence is high for US businesses at this point, but if changes don’t arise from the new administration, that confidence can quickly disappear.