Economic Roadkill

From it's mid-summer record peak, the Baltic Dry Index, a benchmark index of shipping rates for 26 dry bulk routes calculated by the London-based Baltic Exchange, has fallen by more than 90 percent, a crash of epic proportions.

Yet the carnage in the transportation industry has not been limited to international operations. Both within and beyond our shores, a fast-spreading economic downturn is having a deleterious impact on firms that transport goods in all sorts of ways, over long and short distances.

In "Freight Haulers Slam on the Brakes," The Wall Street Journal reports on the carnage unfolding in a key U.S. industry.

Expecting the Weakest Year in Three Decades, Truck, Rail and Ocean Shipping Firms Are Cutting Back

In a normal year, Gordon Trucking Inc. might replace 20% of its fleet of 1,500 big rigs with new trucks. But given the bleak outlook for the freight business, the Pacific, Wash., hauler doesn't intend to buy a single new truck next year.

"We're settling in for nuclear winter in the first half of 2009," says Steve Gordon, operating chief for the company, which hauls everything from paper products to electronics.

He's not alone. Some industry executives and analysts predict that 2009 could be the worst year for freight-transportation volume in three decades or more. As a result, companies in industries ranging from trucking to railroads to ocean shipping are scaling back sharply.

Ocean freighters are docking vessels and putting off delivery of new ships. Rail-car production is expected to plummet as railroads put box cars in storage rather than buy new ones. And U.S. trucking companies are projected to buy just 101,000 tractor trailers next year, down an estimated 22% from this year and 64% from two years ago, according to freight-transportation forecaster FTR Associates.

Next year "is going to be the worst year for transportation demand in 30 years," FTR economist Noel Perry said in an industry conference call last month.

The drop comes as weak consumer spending has prompted retailers and other businesses to delay or reduce orders. As the carriers have responded, their retrenchment already has reverberated across various industries that heavily rely on haulers to transport supplies and raw materials, including U.S. auto makers and home builders teetering on the brink of collapse.

Business is so bad that FedEx Corp. and United Parcel Service Inc. canceled their annual predictions of how many packages they would handle in the peak shipping days before Christmas. The couriers, the world's largest cargo airline and the world's biggest ground courier, respectively, are looked to by economists and other analysts as barometers because they carry a combined average of 22 million packages a day. "The economy is so unpredictable that we're just not comfortable making a prediction," says UPS spokesman Norman Black.

UPS, which reported a 9.9% decline in third-quarter profit, expects U.S. package volume in the current quarter to fall 4% from a year ago.

FedEx on Monday substantially cut its earnings outlook for the fiscal year ending May 31 and said it would announce additional cost-curbing plans when it reports quarterly results on Dec. 18. FedEx declined to comment further.

 Trucking company Con-Way Inc. this week announced an 8% work-force reduction in its freight division, eliminating about 1,450 positions.

Across the trucking industry, volume fell 6.3% from July through October, when volume usually begins to grow as retailers restock their inventories ahead of the holiday season, according the American Trucking Associations. But not this year. November remained weak. "It doesn't look like December's any better," says Stifel Nicolaus & Co. analyst John Larkin. "It could actually be worse."

Several truck manufacturers, such as Daimler Trucks North America and Kenworth Trucking Co., are closing facilities, severely cutting back production or laying off employees.

At a Kenworth plant in Renton, Wash., more than 400 employees will lose their jobs when the company, a subsidiary of Paccar Inc., suspends making heavy-duty highway trucks at the plant next year, according to Don Hursey of the machinists union, who says he has been briefed on the plans. Just a few years ago, the plant produced 50 big rigs a day, he says. A Kenworth spokesman declines to specify how many workers will lose their jobs.

"This is the tip of the iceberg," Mr. Hursey says. "It's going to be a disaster next year for the entire industry. I'm scared to death."

The picture is similar on the rails. Delivery of new railcars could drop below 40,000 next year from a projected 58,000 this year, according to analyst Paul Bodnar of Longbow Research in Cleveland. U.S. railroad car-load volume dropped 10% last month from a year earlier, the biggest drop since the Association of American Railroads began tracking such data in 1997.

Norfolk Southern Corp. plans to cut costs by reducing the number of trains it operates, laying off workers and parking some rail cars, says Chief Executive Charles W. Moorman, citing the industry's weakness last month.

For ocean shipping lines, the global downturn is particularly brutal. The lines have been slashing prices in the face of plummeting demand. The industry also is plagued by overcapacity, as some carriers are taking delivery of new ships that were ordered several years ago, when the global economy was booming. Greek ocean shipper DryShips Inc. on Wednesday announced it was canceling $400 million in orders for four new dry-bulk vessels.

Maersk Line, the world's largest ocean shipper by volume, plans to lay up eight vessels because of declining freight volume. Parent A.P. Moller-Maersk A/S reported a third-quarter drop of 3%. Should economic conditions fail to improve next year, the possibility of mothballing even more ships "is obviously something we have to look into," says Michel Deleuran, group senior vice president. "I have not experienced anything that is quite as severe as this."

Not everyone in the freight-hauling industry is quite so gloomy, however. Ray Kuntz, the chief executive of Watkins Shepard Trucking Inc., says he expects business to improve in the second half of 2009 for stronger trucking firms who will pick up business as weaker competitors shut down. Still, the Missoula, Mont., company, which has 700 trucks and 1,100 employees, trimmed its work force by 5% in the fall and has no plans to buy new trucks next year.

Comments

[Abraham]

Great charts, very dramatic.

Seem like leading indicators to me, aye?

[ron]

Food supply is the most critical transportion issue confonting America. We no longer have a viable regional local farming, process and distribution system.
The idea that millions will not find food on the shelves and are ill prepared to feed and cloth themselves is another important result of JIT distribution.

[roger]

Transportation is the life blood of commerce,need not say more,
except it looks like a cardiac arrest.

[xqqme]

That's me, so to speak in the last paragraph. As other 'overleveraged' trucking companies fall by the wayside, I have been preparing for this for 2 years.
Instead of bidding on loads now, companies are now calling me and meeting MY price. I've had the best year EVER.
The only downside is that I have to leave alot of loads at the dock so to speak because I am not planning to expand at this time. But if and when deflation hits, I will be able to expand at lower costs. Until then I'm in survival mode. Steady as she goes.

[Irene]

This spells hiperinflation.

Iperinflation is driven by food and other items of first necessity that people absolutely need to buy. Transportation difficulties will put upward pressure on prices. The difficulty of distributors to get letters of credit will force cash transactions. This again will cause huge price pressures. Then salaries will have to raise. Companies will borrow at very low rates to finance salary rises so that they employees can eat. If they don't eat, they don't survive anc can't work, it's as simpe as that. But then prices will need to hike across all other services etc..