Business Inventories Back In-Line
RedStone Resource
April 18, 2024
Inside This Edition
Transportation Prices Mixed in March
In the wake of the Yellow closure last year and tighter controls of inventory, LTL prices were the highest in the group. LTL prices were up 5.2% year-over-year and were 0.5% higher monthly. Again, historically when a major LTL bankruptcy hit the market, prices were 4-8% higher for a year afterwards until capacity was able to balance and the market cooled.
Keeping an Eye on the Persian Gulf
Although it was not an issue changing global distribution at the time of writing, some concerns are mounting over the Strait of Hormuz and the possibility that it turns into a scenario similar to the Red Sea situation. Conflict between Israel and Iran had heightened the risk of a combative environment in the Strait of Hormuz, one of the world’s most significant chokepoints. A ship owned by an Israeli billionaire was hijacked by Iranian forces in one of the more aggressive moves in years in the region.
Container Volumes Expected to Be 11% Higher Y/Y
The Panama Canal Authority (PCA) has increased the number of daily slots for transits through the lock system to 27, approximately 8 slots a day shy of the long-term average of 35 slots per day. Drought conditions have started to ease and some strategies by the PCA to improve water utilization is also helping reduce the impact of the drought.
Economic Briefing
Business Inventories Back In-Line
Over the past 18 months, business inventories have been bloated and this has choked off the upper portion of the global supply chain. As companies received new orders for merchandise, they were able to pull products from inventory and could use less assembly line activity. That shut off demand for raw materials, energy, and labor in the upstream portion of the supply chain. That also is what allowed the world to see generally good macroeconomic activity and yet the global supply chain remained flat. But that is changing.
This new cycle, the first in more than 18 months, will see the entire supply chain once again reignited in the wake of this global destocking period. A new order will fire up demand up and down the supply chain. Fewer than 30% of US businesses had inventories that were heavier than the period before the pandemic, and many sectors in the US are sitting much lighter than they were prior the pandemic. Again, this is a different phase and business cycle than we have seen in the past 18 months, which will usher in changes across the entire supply chain.
Transportation Prices Mixed in March
The Producer Price Indexes for March were released, and it showed the prices for various forms of transportation were mixed. In the wake of the Yellow closure last year and tighter controls of inventory, LTL prices were the highest in the group. LTL prices were up 5.2% year-over-year and were 0.5% higher monthly. Again, historically when a major LTL bankruptcy hit the market, prices were 4-8% higher for a year afterwards until capacity was able to balance and the market cooled.
Truckload prices, however, were still much weaker, coming in at 6.5% lower year-over-year. They were up just slightly in March over February’s levels (up 0.1%) and were in-line with the long-term trend.
Rail prices remained stable in the month with rates up 0.8% year-over-year (unchanged month-over-month).
Oil prices are rising but diesel prices have remained stable in the last few months. That has helped keep overall prices a bit lower for domestic distribution. But as seasonal increases in freight volumes start to pick up, that will impact diesel consumption and prices will rise.
Transportation Briefing
Keeping an Eye on the Persian Gulf
Although it was not an issue changing global distribution at the time of writing, some concerns are mounting over the Strait of Hormuz and the possibility that it turns into a scenario similar to the Red Sea situation. Conflict between Israel and Iran had heightened the risk of a combative environment in the Strait of Hormuz, one of the world’s most significant chokepoints. A ship owned by an Israeli billionaire was hijacked by Iranian forces in one of the more aggressive moves in years in the region.
Even if ships or crews are not specifically in danger, at some point in time, insurance firms would begin to be wary of covering ships traveling through the tight strait. More than 17.2 million barrels a day of crude oil flows through the Strait (oil from countries that are largely land-locked in the Persian Gulf. In an emergency, some oil could find its way across land at a much higher rate, but oil prices would certainly take a hit as a result of any disruption in the Persian Gulf from oil flows. Again, supplies are not being hampered at the time of writing and oil prices were easing slightly, but the risk remains.
Container Volumes Expected to Be 11% Higher Y/Y
The National Retail Federation and Hackett and Associates have released their latest Global Port Tracker, and it shows a more optimistic view for TEU traffic in 2024. TEU’s will average slightly more than 2 million units in the four months from May through August. If those figures hold, this is expected to boost total first half 2024 TEUs by 11% versus last year at this time. This would put total TEUs above the 2017-2019 average of 21.8M for the full year if these trends continue (2023 ended with 22.3M in volume).
Intermodal volumes are picking up for rail firms as well across the USMCA markets and with inventories more balanced on a global scale, that will lead to more freight activity. Prices for all types of commodities and transportation services should inch up commensurately with this increase in freight activity, perhaps the strongest in more than 18 months.
