Supply Chain Council of European Union | Scceu.org
Freight

COVID-19 wreaks havoc on transportation | 2020-05-22

KANSAS CITY — Logistics at all levels and in all modes have been in the thick of the disruption caused by the coronavirus (COVID-19) so far in 2020. Sharply reduced tonnage and redirection of shipping routes were just two of the most prominent ways transportation was disrupted while moving essential food and other items during the peak of the pandemic.

Ocean freight and rail shipments have tumbled during the pandemic, while truck tonnage first surged and then plunged. Freight rates for grain and other products generally are down from a year ago, some sharply, as are fuel prices.

Effects of COVID-19 on grain movement have been mixed. The shutdown of numerous ethanol plants due to low fuel demand and prices has greatly reduced corn deliveries to those plants, although much of that was local or at most regional. Likewise, rail and truck transportation needed to ship ethanol has greatly declined.

But other grain shipping needs, such as to mills and processors, surged when near panic buying of flour and other staples skyrocketed early in the shelter-at-home period only to drop to more normal levels, or even lower, once that buying subsided. Grain and oilseed exports, meanwhile, may have experienced temporary port delays related to COVID-19 but generally were more affected by regular supply-and-demand fundamentals existing before the pandemic. And ocean freight rates have been pressured as overall demand for ocean freight was reduced, largely due to COVID-19.

One meaningful positive for consumers amid the economic slowdown and sheltering at home was drastically lower fuel prices. A crude oil price war between Russia and Saudi Arabia in March created a global supply glut. Then sharply lower fuel demand contributed to historic weakness in energy markets, providing some relief to shippers in the form of lower diesel fuel costs.

The US average highway price of diesel fuel as of May 11 was $2.39 per gallon, down 69¢, or 22%, from the 2020 high in early January and down 77¢, or 24%, from a year earlier, according to the Energy Information Administration of the US Department of Energy. However, prices appeared to be stabilizing in May after dropping sharply in the first quarter.

Lower fuel prices reduced the average railroad fuel surcharge in May to 7¢ per mile from 11¢ in April and from 14¢ in May 2019. Fuel surcharges for certain routes were zero.

Much of the attention was on the trucking industry, because of its high visibility to consumers, because that’s what could be redirected most easily during the pandemic, and because it is trucks that are responsible for the “last mile,” delivering items to retail or directly to those using them, whether that be food or personal protective equipment for first responders, frontline health care staff or meat and food plant workers. Even though truckers were deemed part of the essential critical infrastructure workforce by the US Department of Homeland Security, and the US Department of Transportation temporarily relaxed certain rules, drivers encountered numerous obstacles such as closed public areas and truck stops early in the shelter-at-home period. Those conditions improved in April.

Truck demand rises, falls with virus

Truck freight rates increased early in the pandemic but have dropped 16% since the April peak, said Jim Ritchie, president and chief executive officer of Redstone Logistics, a North American truckload brokerage and logistics management and consulting service based in the Kansas City area. But rates still were up from March.

He suggested shippers compare spot and contract freight rates for the best value in the next 60 days, noting that spot rates currently were lower in some cases. As demand begins to increase, he expects trucking companies will try to raise rates too much, too quickly because there still is excess capacity, which will keep rates somewhat subdued, he said.

Mr. Ritchie expects truck freight demand will “run in place” through May but then begin to increase. He noted a 12% increase in truckload volume at his company through mid-May, which he attributed to advanced ordering for the reopening of businesses.

The American Trucking Associations’ (ATA) Truck Tonnage Index in March was 120.4 (2015=100), up 1.2% from February and up 4.3% from March 2019 on a seasonally adjusted basis. The index for the first quarter was up 1.5% from the October-December period and was up 2.4% from January-March 2019.

“March was the storm before the calm, especially for carriers hauling consumer staples, which experienced strong freight levels,” said Bob Costello, chief economist of the ATA. “But there was a huge divergence among freight types. While freight to grocery stores and big box retailers was strong in March, especially late March, due to surge buying by households, freight was anemic in other supply chains, like that for gasoline, restaurants and auto factories. Because of this, and the continued shuttering of many parts of the economy, I would expect April tonnage to be very soft.”

Tonnage data for April was not yet available.

Chris Spear, president and CEO of the ATA, said in a late April blog: “Truckers are the difference between store shelves getting restocked and remaining empty. As crucial as they’ve been in responding to the outbreak and curbing its impact, truckers will be just as pivotal now as we turn toward recovery. Trucks have kept rolling while the rest of the country stays locked down, and they’ll remain at the forefront when called to power our economy back up.”

A late-March/early-April survey of the trucking industry indicated truckers’ experiences and expectations during the pandemic. The Owner-Operator Independent Drivers Association Foundation and the American Transportation Research Institute surveyed more than 90,000 in the trucking industry, generating about 5,100 useable responses.

“Freight movement is both volatile and depressed,” the survey results said. “Trucking activity during the COVID pandemic is generally suffering with several exceptions,” with many sectors experiencing considerable to dramatic reductions in loads and trips. The survey showed that trip velocity increased due to reduced traffic, especially during rush hours in larger metropolitan areas. It also showed that trip length declined during the pandemic, with 8% of trips 100 miles or less before and 18% during, while regional trips (100 to 499 miles) increased to 34% from 31% and inter-regional and long-haul trips declined to 48% from 61%. The shift was attributed to reduced long-hauls of international containers and increased movement of essential consumer goods on a local and regional basis.

The type of freight was important, the survey showed. Forty percent of respondents with five-axle refrigerated trailers indicated much higher or somewhat higher volume — the only group of eight in the survey to show higher volume rather than lower volume. Dry van operators indicated volume was 28% much higher or somewhat higher while more than 40% said it was much lower or somewhat lower.

The survey showed about 50% of respondents expected much worse or somewhat worse demand for trucks over the next two months, with just over 30% expecting better demand. About 20% expected traffic to remain the same.

“The industry’s expectations over the next few months are that freight levels will decline or stay the same; optimism is not high in the short term,” the results said.

In a guest column in the Journal of Commerce, Jeff Tucker, CEO of Tucker Company Worldwide, a privately-held freight broker, continued the pessimistic view, saying that freight volume may not return for years during which time driver numbers and carrier counts will decline, and that ultimately, shippers will have fewer choices, higher prices and shortages of capacity. He cited economist Noel Perry, who on April 24 forecast that freight volumes may not return until 2024. Mr. Tucker noted that many small trucking companies, which make up the bulk of the US trucking industry, were not taking advantage of the paycheck protection plan, which could accelerate the decline in trucking volume if those companies fail.

“We don’t know how the recovery will occur,” Mr. Ritchie said. “I’m cautiously optimistic. There is some pent-up demand that will drive a stronger-than-gradual recovery.”

However, he said a sharp recovery was unlikely because “some businesses and jobs are gone forever.”

Railroads see worst April on record

Unlike a year ago when railroads dealt with bouts of severe winter weather and then massive flooding and track closings in the spring, the 2020 winter was relatively mild and spring flooding was minimal, allowing railroads to maintain strong service other than sporadic and typical weather issues, maintenance, and congestion restrictions at some mills and food manufacturing plants. But COVID-19 has brought its own set of troubles for the railroad industry.

Railroads just finished one of their worst months in history (at least in records back to 1989). US railroads originated 980,535 carloads in April, down 25% from April 2019, and 1,095,423 containers and trailers, down 17%, the Association of American Railroads (AAR) said. Combined carloads and intermodal originations were down 21% for the month. Farm products excluding grain (but including grain mill and food products) and “all other” carloads were the only categories to show gains in April. For the year to date through May 2, total carloads were down 12%, intermodal was down 11% and combined carloads were down 11%. The only positive group (out of 10) was “all other” up 3.6%, while farm products excluding grain were down 1.5%. The AAR tracks 10 major traffic groups that include 20 distinct categories.

“To no one’s surprise, the pandemic made April a challenging month for rail traffic,” said John T. Gray, senior vice president at the AAR. “The 25.2% year-over-year decline in total rail carloads was the worst decline for total carloads for any month since our records began in 1989, and the 17.2% decline in intermodal loadings in April was the worst since the summer of 2009. Coal and autos were by far the worst-hit commodities in April. We don’t know exactly when it will happen, but our economy — and rail traffic — will rebound.”

During April earnings calls, CSX, Kansas City Southern, Norfolk Southern and Union Pacific all indicated they would reduce rail capacity because of the drop in freight demand.

“The reason we’re reducing train starts is because volumes are down, and all we need to do is to have an honest dialog with our customers about the fact that we don’t think we can serve them five days a week,” Jim Foote, CEO of CSX, said on an April earnings call.

Grain movement generally was not a contributing factor to COVID-19-related railroad volume decline. For the week ended May 2, grain, at 22,653 carloads, was the only commodity group of 10 to post a gain, up 355 carloads from the same week a year earlier. Year-to-date grain carloads totaled 369,112, down 6% from the same period last year. Farm products excluding grain for the week tumbled 16% from a year ago.

Rail deliveries of grain to US ports totaled 106,324 carloads through April 29, down 26% from the same period a year earlier, according to USDA data, although the average over the prior four weeks was down only 11% from the same four weeks a year earlier and was down a mere 2% from the four-year average.

Because of the reduced tonnage, and generally favorable weather, rail freight rates have been favorable for shippers. Average May shuttle train secondary bids and offers were $149 (per car) below tariff for the week ended April 30, down $39 from a week earlier and down $59 from the same week a year ago, the USDA said. Non-shuttle bids and offers were lacking. Non-shuttle trains as of April 30 for June delivery were down $88 per car, with no bids or offers reported for July cars for either non-shuttle or shuttle trains.

First-quarter rail tariff rates for shipping wheat to the PNW and the Gulf from both Kansas and North Dakota were unchanged from the October-December period. Compared with the first quarter of 2019, first-quarter 2020 rates to the PNW were up 1% from Kansas and were down 2% from North Dakota, while rates to the Gulf increased 2% from Kansas and were up 1% from North Dakota.

Grain inspected for export from US ports during the first quarter totaled 25.2 million tonnes, down 15% from the first quarter of 2019, down 18% from the five-year average and the lowest since 2013.

“The decline stemmed mainly from progressively lower demand in Africa and Europe,” the USDA said. “All three grains — corn, wheat and soybeans — registered a decline.”

The only area to post an increase was the “interior” because of record shipments to Mexico during the quarter.

Combined wheat, corn and soybeans inspected for export for the respective marketing years to date as of May 7 were 82,810,443 tonnes, down 10% from the same period a year earlier, which indicates lower grain transportation demand. Cumulative all-wheat exports were 23,436,677 tonnes, up 2.7% from a year earlier, corn exports were 25,012,035 tonnes, down 32%, and soybeans were 34,361,731 tonnes, up 5%.

Barge traffic up; ocean freight down

Grain barge movement on the Mississippi, Illinois, Ohio and Arkansas rivers, which is mainly corn and soybeans, for the year to date to May 2 was up 15% from the same period a year ago, with corn at 5,268 loads, up 22%, soybeans at 3,899 loads, up 19%, wheat at 558 loads, down 30%, and other grains at 30 loads, down 41%, according to the USDA.

Dry bulk ocean freight was one of the sectors “most affected by the COVID-19 outbreak worldwide” in the first quarter of 2019, the USDA said in its April 16 Grain Transportation report. Ocean freight rates typically drop from the global new year through the Lunar New Year, which this year nearly coincided with the onslaught of COVID-19. While rates dropped from the fourth quarter of 2019, most still were up from a year earlier. It was noted that demand to ship coal and steel were most affected.

“Despite multiple reasons for the slowdown, its outsized impact on China — including COVID-19’s first hot spot in Wuhan — caused much of the slump in bulk trade, leading to lower freight rates,” the USDA said.

China represents 33% of the world’s dry bulk trade, according to Drewry Maritime Research, Inc.

“Since the beginning of January, ocean freight for shipping bulk commodities (including grains) have continued to drop, mirroring the slump in global bulk trade,” the USDA said. “Despite rallying slightly between Feb. 13 and March 5, rates (also) have continued to decline since then.”

The cost of shipping grain from the US Pacific Northwest to Japan was down 12% from October-December but up 1% from a year earlier and up 16% from the average. Rates from the US Gulf to Europe were down 22% from the final quarter of 2019, down 11% from the first quarter and down 1% from the average. The pandemic ultimately may drive ocean freight rates higher, the USDA said, since 56% of new ship building tonnage in 2020 and 67% in 2021 was scheduled to come from China.

Container shipping was devastated by the pandemic, largely because of the slowdown in trade with Asia, and with China in particular. The ports of Los Angeles and Long Beach, which make up the San Pedro Bay complex, handle 25% of all US exports and 40% of containerized imports. It was estimated that US retail container port imports in March were the lowest in five years, which reverberated through the rail industry (intermodal) and the trucking industry.

Demand for grain transportation, of course, will be affected by the size of the 2020 crops, recovery of the ethanol market, ongoing export demand and other factors, not the least of which is COVID-19.

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