Keep on trucking—in theory, at least. In practice, a trucking shortage is threatening to force metals industry players to pay big time for transportation services as competition for available trucks heats up.
Those wishing to make spot metal purchases from traders in the physical market—be it to ramp up production or to restock inventories that had been depleted during the economic downturn—face longer delivery times and higher premiums due to tightness in the domestic trucking market.
"There's definitely a shortage of trucks, and it's going to affect premiums probably for the rest of this year and into next year," one Midwest copper trader told AMM.
According to traders, getting their hands on trucks in recent months has been no easy task, and end-use consumers are caught footing the bill.
"Starting about two to three months ago trucking began to get extremely difficult," one primary aluminum trader said. "It's literally that bad, and it's not a fuel-related issue this time. Now it's just very much an issue of availability."
With available trucks few and far between, freight rates have climbed some 50 to 70 percent over the past few months, the trader said, noting that one route that had cost $750 now runs upward of $1,100.
The higher freight rates have resulted in firmer premiums across the commodity spectrum. "The cost of getting metal out has become very, very high right now," the aluminum trader said.
Where physical premiums typically included a penny per pound to cover freight, rising trucking costs have added up to 50 percent on top of that. "You can't ship anywhere for less than a penny and a half (extra)," the trader said.
Aluminum premiums were in a range of 6.5 to 6.75 cents per pound in early August compared with a historic average of around 4.5 cents. Likewise, spot copper premiums were 5 to 6.5 cents per pound at the end of July vs. 5 to 6 cents a month earlier after hovering in the 3.5- to 4.5-cent-per-pound range since the start of the year.
Competition for a fixed fleet of existing trucks is currently the main driver behind rising costs. "We have both standing arrangements and use numerous truck brokers. In effect, some of us are fighting over the same things," the Midwest trader said. "It is costing more, so we're going to have to raise our rates as well."
Higher shipping rates have been brought on by the recession's impact on fleets, and traders said they don't see any short-term solutions.
Despite charging more for their services, trucking companies that weathered the recession might not be in a financial position or be willing to add capacity, and the prospects for new entrants to the market are grim. Carriers often operated below cost on the spot market last year as truck tonnage fell some 9 percent in 2009, sustaining tonnage losses first seen in 2008.
Even as rising manufacturing output and stronger retail sales increased shipments through the first half of 2010, carrying capacity remains at or below 2009 levels, sources said. And with tight credit and volatile energy costs, the ability of carriers to make the investments required to expand their fleets is limited.
Those looking to get metal on trucks also must compete with seasonal demand from other commodities, including shippers more willing to pay the higher price. Throughout the summer, agricultural demand in particular complicates the carrier supply issue as produce growers race to get their perishable goods to market.
"Produce has to move to market right now," the copper trader said, noting that the seasonal agricultural sector can't shoulder delays.
The trucking shortage, while more pronounced in certain regions, has taken on a nationwide character, traders said. "The South has been particularly bad, but even in the Chicago area we've had difficulty getting trucks," the aluminum trader said.
The trucking companies themselves are unsure of how to best adjust their capacity structure moving forward. "Capacity is way down, and things seems to have gotten busy," a source at a Northeast hauler said. "It is difficult, so of course the rates have gone up."
Spot trucking rates are the first to increase, and often serve as a harbinger for long-run increases in base rates. The margins on trucking rates are forecast to increase for the first time since 2008, according to data from Nashville, Ind.-based trucking logistics firm FTR Associates. And if trucking companies do add equipment, these costs will be reflected in the rates.
"Demand did pick up somewhat and capacity did drop off," the Northeast hauler source said. "A lot of trucking companies and owner-operators have gone out of business in the past year."
Indeed, by some estimates close to 2,000 trucking companies went out of business last year and companies continue to go under even as conditions appear to be improving.
As for how, or even if, carriers will respond in the short term, "that's a good question, and I'm not sure I have an answer for it," the hauler said.