August 24, 2011

Big shippers see continued demand slowdown

Uncertainty about economy is leading shippers to pare inventories, shift traffic from truck to intermodal, survey finds.

By Mark B. Solomon

A group of the nation's leading shippers has forecast continued economic and freight sluggishness heading into the peak holiday shipping season and beyond, with an increasing number planning to pare back inventory levels in response to uncertain demand trends, according to a third-quarter survey conducted by the New York City-based investment firm Wolfe Trahan.

At the same time, the 120 shippers surveyed are continuing to divert their traffic from truck to rail intermodal. The respondents said they shifted 5.3 percent of their volumes from truck to intermodal in the second quarter, while only converting 1.1 percent of their shipments from intermodal to truck. The "net" diversion of 4.2 percent represented the largest shift from truck to rail in eight years, the firm said. Respondents say they expect the pace of truck-to-intermodal conversion to accelerate in the third quarter.

The 120 respondents, which combined account for about $25 billion in annual transportation spending, expect a 2.9-percent increase in same-store sales—activity in stores open for at least a year—over the next 12 months. That represented a decline from second-quarter estimates and is the lowest level in more than a year, the firm said.

About 34 percent said in the third quarter that they expect to reduce inventory levels over the next 12 months, down from 22 percent who said in the second quarter they would take similar action. Pessimism among shippers accelerated as the quarter has progressed, with volume expectations weaker among shippers that completed the survey in August than those who turned in their results in July, according to the firm.

Despite the dimmer expectations, most shippers still forecast modest growth in peak season volumes compared with a year ago, the survey found.

The slowdown in volumes is expected to manifest itself in a moderation of carrier rate increases. Shippers expect a slowdown in the pace of rate hikes across all modes, with rail and truckload rates the most resistant to downward revisions. Rates for intermodal service, which many had expected to be elevated due to increased shipper demand, have "moderated noticeably," the firm wrote. Pricing for international air and ocean freight remains weak due to a sharp slowdown in traffic that began in late spring, the firm said. Shippers expect "flattish airfreight and negative ocean [freight] rates," the survey found.

Truckload capacity remains tight despite weakening demand, with 56 percent expecting space to become dearer going forward. By contrast, less than 20 percent of shippers are experiencing tight capacity conditions in the less-than-truckload (LTL) sector, a factor that may make it difficult for LTL carriers to sustain recently announced rate hikes ranging from 4.9 to 6.9 percent on shipments not moving under a shipper-carrier contract.

Of the 120 respondents, 68 percent had annual transport budgets of more than $25 million. About 48 percent had annual budgets exceeding $100 million, Wolfe Trahan said.

More articles by Mark B. Solomon

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