While rising oil prices, availability issues, and operator shortages test the North American transportation sector's improvement, all signs still point to a healthy 2011.
Rising oil prices drive down US trucking availability
Conflicts in the Middle East--namely in OPEC nations such as Libya--have caused the price of oil to skyrocket, resulting in unsustainable transportation cost increases in the US trucking industry. Many independent owner/operators have sidelined their rigs and dropped out of the market because rapidly increasing fuel surcharges still do not cover the full cost of gas. As it is, drivers (and larger trucking companies as well) have to subsidize fuel costs, and such sharp swipes out of their bottom line have left many with no choice but to cease operations. In fact, sources tell SteelOrbis that the current driver shortage may very well be worse than it was this time last year--a situation that had negative ripple effects throughout the remainder of 2010.
The American Trucking Association (ATA) is significantly concerned about this issue, and the association has recently lobbied the US government to open access to domestic energy sources as a way to relieve the situation. During a US Department of Interior hearing in February regarding the agency's five-year plan for offshore oil and gas production, ATA Vice President and Regulatory Affairs Counsel Rich Moskowitz said, "Despite advances in alternative energy, the trucking industry will continue to depend on traditional diesel fuel for the foreseeable future." And according to ATA President and CEO Bill Graves, fuel is the second largest expense in the trucking industry, so rapid spikes in fuel prices has put the industry at severe risk.
On a more positive note, however, the ATA has voiced support of the recent announcement by the US and Mexican governments of plans to implement the long-delayed cross-border trucking provisions of NAFTA. Mexican trucks operating on US highways will be required to meet the same safety standards as US fleets, although they will be prohibited from hauling freight between destinations within the US (traffic will be restricted to cross-border activity only). "We hope this agreement will be a first step to increasing trade between our two countries, more than 70 percent of which crosses the border by truck," said Graves.
Overall, traffic in the US trucking industry is continuing on an upward trend, with the ATA's advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increasing 3.8 percent in January after rising a revised 2.5 percent in December 2010. However, the not seasonally adjusted index, which represents the change in tonnage actually hauled by the fleets before any seasonal adjustment, equaled 105.4 in January, down 2.9 percent from the previous month. Compared with January 2010, SA tonnage climbed 8 percent, which was the largest year-over-year increase since April 2010. For all of 2010, tonnage was up 5.7 percent compared with 2009.
Robust North American rail traffic keep freight rates firm
The North American rail sector has not been as significantly affected by rising oil prices, as rail is a much more fuel-efficient mode of transportation when compared to trucking. As a result, rail might soon be seen as a viable alternative to trucking, especially if fuel costs keep rising and outweigh the benefits of faster delivery. In fact, a recent article by the Association of American Railroads (AAR) highlighted the North American rail industry's efforts to partner with trucking companies for short-haul services. According to the report, representatives from Norfolk Southern, CSX and BNSF attended the 2011 Truckload Carriers Association convention in the hope of striking "mutually beneficial deals with highway freight haulers." If trucking companies passed off certain short-haul services to railroads, it could "reduce both their fuel costs and strain on drivers." It remains to be seen if such agreements will come to fruition.
Already, railroads are increasingly busy, especially in raw material shipments such as iron ore and coal. Rail companies have been firm in their freight charges, leaving customers little room for negotiation, even in light of rising fuel surcharges. Surcharges for April will be 23.5 percent, an increase from March's rate of 21.5 percent. The increase year-over-year is much more pronounced, however: April 2010 surcharges were 15.5 percent, which was also a significant year-over-year increase from the April 2009 rate of 9.5 percent. Overall, surcharges have been rising steadily since August 2010, and the trend will most likely continue, especially in the summer months when fuel prices are notoriously high.
Despite the fuel situation, cumulative rail traffic this year has continued to increase from year-ago levels. According to the AAR, total carloads of rail traffic volume for the first 10 weeks of the year on 13 reporting US, Canadian and Mexican railroads were 3,716,402, up 4.1 percent from the same period of 2010. Containers and trailers were up 7 percent, while metallic ore shipments increased 9 percent, metal products improved by 7.5 percent, and iron and steel scrap jumped 6.1 percent.
North American barge market rides high on heavy Southbound traffic
Similar to the North American rail sector, barge traffic on US riverways remains strong while freight rates are firm. In fact, barge shipments for iron ore, coal and other bulk commodities are in such high demand that the less expensive, open-top barge market has been overrun and shipments have spilled over into closed-top barges, which are usually reserved for grain and weather-sensitive steel products. Southbound traffic, as usual, is leading the market, and there is so much demand for shipments down the Mississippi River (and so much profit to be made), that many barge operators would rather send an empty barge upriver to accommodate a Southbound shipment than wait around for Northbound cargo to be loaded and risk losing the Southbound account. What this means for the steel industry is that any Northbound cargo, namely import shipments arriving in the Gulf, will likely face steep transportation costs and slim availability.
On the Great Lakes, iron ore shipments swelled in January, totaling 3,045,269 net tons and representing a 60 percent improvement from year-ago levels. More tellingly, loadings were up 20 percent from January's five-year average, reflecting genuine improvement from the economic crisis. In fact, demand for iron ore was so strong in January that the shipping season at the Sault Ste. Marie locks was extended by three days. Overall, total dry-bulk loadings totaled 3.4 million net tons in January, up 46 percent from 2010 and 18 percent better than the month's five-year average.
In other barge news, efforts from Michigan lawmakers to close the locks between the Mississippi River and Lake Michigan, in order to prevent Asian carp from entering the Great Lakes, gained the support of Illinois lawmakers in early March. As a combined force, they plan to introduce the Stop Asian Carp Act into the US Senate and House of Representatives, and if passed, the lock closure would interrupt a key transportation for the steel industry.