Coronavirus impacts transportation industry outlook; spot rates to increase

The coronavirus, or COVID-19, has thrown a new level of uncertainty into the 2020 outlook for the transportation industry. Meanwhile, spot rates are expected to rise as contract rates fall this year, a logistics executive said. Spot rates refer to the rates shippers pay carriers to haul freight within about a day of the shipment.

In a recent webinar, Chris Pickett, chief strategy officer for Coyote Logistics, recently spoke about the outlook for the transportation industry. Coyote is a Chicago-based third-party logistics company owned by UPS Inc.

Pickett said a potential recession could impact how much the rates rise, but they are projected to increase. Contract rates should continue to fall for at least another quarter, but the market could start to tighten as early as the second quarter. The first quarter of the year isn’t expected to feel tight, he said.

Dry van spot rates declined 5.2% in February, from the same month in 2019, according to DAT Solutions. The rates fell 4.3% in February, from January.

The worst of the spot market looks to be in the past, but the next two quarters should be challenging, said Pickett, adding that this year is expected to have a different feel than in 2019. He noted industrial production and imports drive truckload volumes, and consumption, as reported by the Bureau of Economic Analysis, indicates where the economy is headed.

In 2015 and 2016, when industrial production fell while consumption remained positive, the economy didn’t go into a recession, he said. In 2020, he expects consumption to be strong, but the risk for a recession remains as production weakens. The second half of the year would be the earliest he would expect a recession.

Pickett suggested shippers have a plan in place in case transportation costs rise. He said to model in whether a 10% to 20% increase in truckload rates would lead them to switch freight to a different transportation mode, such as intermodal. Delivery times usually take longer for intermodal shipment, and shippers typically have less control of freight in transit, he said.

In a March 2 report on the rail transportation industry, analyst Justin Long, senior associate Brian Colley and associate George Sellers, all with Little Rock-based Stephens Inc., said those in the industry were cautious on the outlook for 2020 because of several factors and uncertainties that could impact results, including the coronavirus, the election and trade negotiations. However, many were optimistic the freight market would improve in the second half of 2020.

“It is clear the primary focus has now shifted to the expected impact from coronavirus as investors are weighing the risks of a near-term pause in freight flows from China with the potential for a recovery / bounce back later this year,” according to Long, Colley and Sellers.

Lowell-based carrier J.B. Hunt Transport Services Inc.’s intermodal segment accounted for 52% of its revenue and 61% of its operating income in 2019. Since the carrier reported fourth-quarter earnings Jan. 17, the carrier’s stock price has fallen 19%, the report shows. Over the same period, the S&P 500 has declined by 11%.

In a report on timely stock picks, Nik Fisken, director of research for Stephens, listed J.B. Hunt as one of 28 companies analysts say have the following characteristics: “best-in-class, above-average returns, proven management, think art collectors stock.” Fisken noted research teams were asked to identify companies with these characteristics, “given the market dislocation and assumption that stocks are ‘on sale’ from last week.”

Intermodal service providers, such as J.B. Hunt and Hub Group, continue to face truck competition, and this has impacted their demand. Both companies expect intermodal volumes to rise in 2020 as the truckload market tightens in the second half of the year, rail service improves and comparisons to 2019 become easier. J.B. Hunt also is benefitting from a rise in market share after the 2019 bid season. The pricing outlook for the 2020 bid season is uncertain, but Hub Group expects flat pricing or for it to be slightly down for the year.

“Trends in dedicated remain positive with a strong pipeline due to private fleet conversions while the truck brokerage is battling headwinds from looser truckload capacity and a heightened level of competitive pressure,” according to Long, Colley and Sellers. “Overall, there are a lot of moving pieces to both of these stories when assessing the different end-market dynamics and company-specific themes; however, we believe the risk/reward remains favorable for both stocks particularly after the recent coronavirus sell-off.”

The coronavirus also has impacted members of the Agriculture Transportation Coalition and limited the capacity at the terminal to store all the containers coming off ships. Protein exporters have been notified of the lack of refrigerated container capacity at China marine terminals as the plugs supplying electricity to containers were all in use. Jeremy Nixon, CEO of ONE, said container ship ONE Hammersmith has berthed at Shanghai port to help to alleviate the plug shortage at the terminals and is expected to remain there until the congestion has improved. The container ship has 800 refrigerated container slots.