War – what is it good for? American freight demand…
We live in chaotic times. Risking a charge of war-mongering, I largely believe that the Russia-Ukraine conflict will be beneficial for the American freight and logistics industry – but only if the conflict stays isolated to eastern Europe and a global war does not break out.
Anyone who has been around trucking for any length of time understands that hurricanes and other natural disasters drive substantial freight demand. These short-term demand surges create a demand for relief supplies to affected areas and rebuilding supplies after the disaster passes. Freight companies largely benefit from government-funded stimulus in the form of transportation demand for moving supplies to assist affected communities.
I’ve known many trucking executives that secretly look forward to hurricane season for this reason. (Sorry; I don’t make the rules.)
Stimulating the freight economy
During a capacity-constrained part of the cycle, any increase in freight demand stimulates the freight economy. These demand surges create much higher spot rates as carriers respond to additional freight demand. While fuel prices also tend to rise, spot rates will rise much faster than fuel prices, and carriers will be able to absorb higher fuel prices due to higher trucking spot rates. For carriers that operate largely in the contract market, they are able to absorb fuel cost increases through fuel surcharges.
For the lucky carriers that operate in the contract market, fuel surcharges generate more revenue than they offset in fuel price increases. For many shippers, the fuel surcharge tables were designed when trucks averaged only 6 miles per gallon. What this means is that for every $.06/increase in fuel, the carrier generates $.01 per mile more in revenue. Newer trucks are pushing 9 miles per gallon, so while they are billing shippers an additional penny for every $.06/increase in fuel, their costs are only going up every $.09/mile.
In the past week, national truckstop retail fuel prices have jumped as much as $.70/gallon. For carriers that have such a fuel surcharge relationship, this could create $.11 more in revenue per mile, while the carriers pay $.07/mile. The $.04 per mile difference goes directly to the bottom line of the carriers.
The counter-argument I’ve heard among trucking executives about how fuel price spikes hurt truckers is the cash flow impact. While there is truth to this, many carriers factor their fuel or have the benefit of fuel advances that can help them pay for fuel immediately in return for a small fee or surcharge.
While all of the price action tends to play out within the first few months of a crisis, there are long-term implications at play as well.
Oil and agriculture
In regard to the Russia-Ukraine conflict, the U.S. freight economy will benefit over the long term. The United States competes with Russia on the global market in two key areas – energy and agriculture. The U.S. is the largest producer of oil in the world. In 2021, the United States produced 18.61 million barrels per day, far more than Saudi Arabia and Russia did individually. Saudi Arabia produced 10.8 million barrels daily, while Russia produced 10.5 million barrels daily.
Much higher oil prices over the past two weeks are a result of the world’s oil producers not being able to absorb the removal of much of Russia’s 10 million barrels of oil daily from the global market. In time, this circumstance will be corrected. The United States has the ability to produce more oil, but it will require additional investment to extract it. High prices will encourage investment in energy production, which drives freight demand in several ways – drilling site materials, oil production equipment and oil from wells.
According to an article by FreightWaves’ Brian Straight, we estimate that for each new oil rig, there are nearly one million truckload miles generated. As investment in drilling accelerates, there should be a net increase in domestic freight demand. Additionally, the United States leads the world in the manufacturing and design of energy-related equipment and technologies.
The U.S. is also the world leader in agricultural production and has a net export surplus. Ukraine is the breadbasket of Europe, supplying the continent with wheat and other dependable food supplies. With war disrupting the growing season and production of agricultural goods by Ukraine, Europe will look for reliable alternative sources.
The U.S. has a surplus of wheat and other grains to meet European demand and will benefit from much higher prices than before war broke out. According to Axios, wheat prices have jumped 70% in the past week alone. Agricultural goods ready for export will drive freight demand from farms in the heartland to ships bound for Europe. The higher prices and surge in demand will flow into U.S. farming communities, driving investment in the sector.
Increased defense spending
While no sane human wants war, it is a reality of the world we live in. The United States has the largest defense industry on the planet. For national security and international arms control reasons, the vast majority of American defense manufacturing and production takes place in this country. And many of the weapons and pieces of equipment being used in Ukraine were manufactured right here in America. A Lockheed Martin plant in Troy, Alabama, produces Javelin missiles; an Elbit Systems plant in Roanoke, Virginia, makes panoramic night vision goggles for the U.S. Army.
In recent weeks, European countries have woken up to the reality that their neighbors to the east threaten their security. Germany announced the biggest increase in defense spending since the 1980s, pledging to keep defense spending above 2% of GDP. (Additionally, American politicians will find great support for increased defense spending as the world comes to term with a Second Cold War.)
The increased industrial production will mean a surge in freight demand. We’ve seen this before. The freight market in 2003-05 was one of the hottest in history, buoyed by domestic military and arms production caused by the wars in Afghanistan and Iraq. History will likely repeat itself.
The threat of global military conflict is something that few in the freight industry would ever hope for. But the world we live in is becoming more contested than it has been in 80 years. With that comes a great deal of pressure on our freight and logistics networks.
Anyone that has studied military conflict can attest that supply chains and logistics win wars and the United States has the most sophisticated logistics networks in the world – and that it is ready for almost anything.
Source: https://www.freightwaves.com/news
Editor: Craig Fuller, CEO at FreightWaves