The old adage, “What goes up, must come down,” is widely applicable, from a baseball toss in the air to market folds.
Truck prices are currently in the “up” stage, not yet ready to drop. Meanwhile, shippers are looking for alternatives — and their eyes are on the rail yard.
Competing with trucks, trains once carried the majority of long-distance freight in the United States. By 1978, the share of railways in long-distance freight transport fell to 35%. Today, trucks dominate, carrying about 80 percent of freight, said Tim Denoyer, ACT Research vice president and senior analyst.
But when cargo capacity is limited and postal rates are high, as they are now, shippers are taking another look at rail and combined transportation.
An increase in imports from Asia arriving at California ports is partly fueling the current market momentum, Denoyer said. U.S. imports rose 34 percent from May, driven by consumer demand that steadily increased after the early stage of the COVID-19 pandemic in the spring and retailers’ needs to replenish inventories, Denoyer said.
Trucks would normally handle the bulk of imported cargo over long distances, from ports to inland points in the United States. But trucking has been plagued with obstacles to meeting higher demand. Factors range from the pandemic in the absence of a driver.
The multiple issues, both positive and negative, mean that spot TL rates are elevated, translating into higher prices for shippers.
The upper hand of trucks: speed and visibility
Higher prices help intermodal companies and railroads get more freight. But it’s usually not the kind of cargo that needs to get anywhere anytime soon, said Dean Croke, principal analyst at DAT.
“If you have a load that doesn’t need to be anywhere in a hurry, you put it on a train,” Croke said. And rail freight is cheaper because of it.
But only certain types of freight transport translate easily between road and rail. Dry goods in containers are usually ideal for trucks and are also an easy job for trains. They include consumer goods such as clothing, electronics, sporting goods and toys — almost anything that can fit inside a container can be transported by dry truck.
Liquid cargo and reefers can also be transported intermodal, said Jim Blaze, a railroad analyst and former Conrail employee.
“If you have a load that doesn’t need to be anywhere in a hurry, you put it on a train.”
Dean Kroc
Principal Analyst at DAT
Intermodal makes sense if there’s a longer lead time, Croke said. Charterers are already thinking about next spring and want to stock up “because the pandemic is still with us,” Croke said. Stock forwarding is an ideal scenario for intermodal transport.
“You can let it sit in the rail system for a longer period of time,” Croke said.
Highly regulated cargo such as manufactured chemicals and hazardous materials do not make good intermodal cargo, Blaze said, although there are some exceptions. Large, bulky cargo is usually handled exclusively by flatbed trucks, although some railroad companies may make exceptions.
There are also factors to weigh in rail hopping. Shipping by rail provides less visibility, at least for shippers.
“The railroad knows exactly where your freight is,” said Nick Little, director of railroad education at the Center for Railroad Research and Education at Michigan State University. speaking to a room full of shippers at the APICS conference in Chicago in October 2018. “They don’t tell you.”
Visibility is indeed a problem, Blaze said. Automated identification tags attached to rail freight have helped speed up data entry for railroads, but they depend on products passing through fixed scanners that use radio frequency beams to pick up cargo at various points, a process Blaze he calls it an “interrogation.” This process is often delayed because cargo must pass through scanners to be tagged.
With most trucks, GPS devices are always transmitting in near real time.
“You have direct, constant communication” with trucks, Blaze said. “With the railways you have occasional communication.”
A tale of 2 tight markets
Many carriers have opted for combined transport and spot prices have increased along with demand. Intermodal spot rates were $1.74 per mile in early October, compared with a monthly average of $1.31 in May, according to Croke.
Overall, U.S. railroads handled about 1.4 million intermodal containers in September, up more than 7 percent year-over-year, according to the latest numbers from the Association of American Railroads. AAR said September was the fourth best intermodal month on record.
“The railroads are moving as much as they can,” Croke said. “And just like trucking, the volumes have become unbalanced.”
“Railroads are not going to go out and grab 10 percent of the market share from trucks because they just don’t have enough equipment capacity.”
Jim Blaze
Railway analyst
Part of the imbalance comes from the fact that it’s even harder for railroads to add freight cars. It takes 12 to 18 months to order and receive a boxcar, Blaze said. Fleets can walk into sales lots and instantly purchase near-new or used trucks.
“The railroads are not going to go out and grab 10 percent market share from trucks because they just don’t have enough equipment capacity,” Blaze said.
Railroads have responded by not always quoting rates, Blaze said, because they are so overwhelmed by shrinking capacity.
“Both markets are tight right now,” Denoyer said, referring to trucking and rail. “What’s happening is just a big stockpile.”
It is a big upheaval for the railways. Denoyer said rail volumes declined for seven consecutive quarters until the numbers turned positive in the first week of October. Intermodal spot prices for the first week of October were up 61% from the same week in October 2019.
Part of the reason for the spot jump is the $5,000 maximum charge that Union Pacific placed on excess contracted cargo on Aug. 30, Denoyer said. The increase was an attempt to manage demand.
However, weeks later, consumer demand remains in the driver’s seat. The volume of loaded TEUs coming into U.S. ports since Sept. 1 has increased 6 percent year over year, Denoyer said. This volume usually ends up on a truck or train. The question for shippers is: Which is best, in a freight market where trucking capacity is limited and where intermodal transportation takes longer?
Blaze said selling TL services to shippers against their rail network competitors is relatively easy. Intermodal and Rail may take longer. Trucks are not hindered by fixed rail tracks. Trucks also have better visibility.
Croke said trucks have the upper hand — especially if delivery times are tight.
“Shippers are looking for service and price,” Croke said. “A driver can arrive [a destination] faster than the fastest train’.