How the Coronavirus Could Impact the U.S. Truckload Market: 2 Scenarios from Coyote’s CSO

March 15, 2020 Chris Pickett

Chris Pickett, Coyote Logistics Chief Strategy Officer headshot

The coronavirus has dominated international headlines since the beginning of the year. As the virus continues to spread across markets, global supply chain professionals are trying to gauge how it will affect their businesses.

Chris Pickett, Coyote’s Chief Strategy Officer, has decades of experience helping shippers navigate market volatility — in fact, his master’s thesis at MIT covered supply chain resiliency in the face of disruption.

He shared his informed perspective to offer more insight into how this outbreak could impact your business.

 


 

After the first cases of the novel coronavirus (COVID-19) were identified in Wuhan, China on January 7th, the virus’s continued spread has caused fear and disruption.

To mitigate its impact to societies and economies, federal, state and local governments across the globe are taking unprecedented steps to contain the outbreak.

Modern supply chains are more global, more interconnected, and more complex than ever before, making the potential for disruption enormous.

 

We see multiple sources of market volatility that could each create shipping surges over the next couple of months:

  • Increased demand for medical, hygiene and foodstuffs
  • New markets for exporters
  • New vendors for importers to replenish inventory
  • U.S. port congestion

 

Today I’ll explore how the coronavirus could impact the U.S. truckload market in the near term, how (if at all) it changes our long-term truckload market forecast and suggest some resources to help you prepare for what is still likely to be an inflationary 2020 truckload market.

 

The Ripple Effect: From Quarantines in China to U.S. Truckload Market Disruption

At the time of writing, the impact of the coronavirus has not yet had a significant, direct impact on the U.S. transportation infrastructure — at least compared to China and more recently Italy.

Warehouses are still shipping, drivers are still hauling and the trains are still running. That said, thousands of people in many U.S. states have tested positive, and dozens of patients have tragically died as a result.

 

We are already seeing significant supply chain disruptions that will continue to ripple across networks over the coming weeks and months.

 

While a majority of the cases are currently clustered in Washington state, California and New York, there is no reason to believe that the outbreak will stop there.

Whether or not we effectively contain the outbreak in the U.S., we are already seeing significant supply chain disruptions that will continue to ripple across networks over the coming weeks and months, starting with the severing of Asia/U.S. trade flows.

 

At a high level, here is the progression from Chinese travel restrictions to direct impact on the U.S. truckload market:

  1. The Chinese economy slowed to a grinding halt as their government issued widespread travel restrictions and quarantines aimed at containing the spread of the virus. These began in January and ramped up through February.
     
  2. Factories closed and transportation slowed. This halted production of new goods and kept exports from making it to seaports.
     
  3. Even if product made it to a port, it was unlikely to be exported, as many sailings were cancelled as a result of the collapse in volume and disruption of port operations. The impact to air freight was similar. Long story short, not much was going into, or out of China.
     
  4. Meanwhile, in the U.S.:
    • Companies that import from China — whether finished goods ready for sale or components that go into other products — are beginning to find themselves short on inventory as safety stocks deplete.
    • Exporters that ship product to China are forced to stockpile inventory, or scramble to find new buyers.

 

China’s prominent role in global trade is difficult to overstate. China accounts for approximately one-third of global trade, has 7 of the 10 busiest seaports in the world, is the largest exporter in the world, and one of the U.S.’s largest trading partners.

Expect similar patterns to unfold as other countries, like Italy, experience widespread travel restrictions and quarantines.

 

A Slight U.S. Buffer

Typically, the U.S. does have a slight buffer between Chinese production and direct impact domestically.

Why? A vast majority of Chinese imports arrive via container ship, which generally takes about two weeks to complete the journey.

Add in the transit time from inland China to a seaport, then the transit from a U.S. port to a warehouse and you can see why the impact is not immediate for many supply chains.

Furthermore, many businesses stockpiled inventory in 2019, trying to get ahead of tariff deadlines stemming from the U.S./China trade war.

 

A vast majority of Chinese imports arrive via container ship, which generally takes about two weeks to complete the journey.

 

As a result, many companies entered 2020 with elevated inventory levels, meaning that some shippers may still have a little more inventory to burn off than usual.

Combined with longer transits, this had the net effect of delaying the crunch for a few weeks. Now that we are several weeks out from the initial containment efforts in China, the U.S. supply chain is starting to experience more of the volatility. 

Conversely, once Chinese production and trans-Pacific freight capacity come back online, we in the U.S. will still have extended transit times. That means that recovery could be quite disruptive as importers unleash pent up demand in an attempt to catch up.

 

How the Coronavirus Could Disrupt the U.S. Truckload Market in the Short-Term

Just because global shipping has slowed doesn’t necessarily mean less demand for truckload shipments in the U.S.

In anticipation of restricted travel (and potentially outright quarantine), consumption patterns will shift, boosting the demand for cleaning, hygiene, and medical supplies as well as perishable and non-perishable foodstuffs.

 

Consumption patterns could shift, boosting the demand for certain products and services. Simultaneously, exporters may be forced to find substitute markets.

 

Simultaneously, exporters could be forced to quickly identify substitute markets for their goods, challenging them with unexpected transportation complexity.

We believe the potential for truckload surges could outweigh any short-term slowdown in spending as a result of containment measures.

In fact, truckload demand may very well outpace carrier capacity in the coming weeks and months. Not only could there be surges in truckload shipping, but we also anticipate significant disruption as inventory levels deplete.

Whether China-dependent or not, shippers may be forced to find alternate sources to replenish stock.

 

We believe that the potential for truckload shipping surges could outweigh any short-term slowdown in spending as a result of containment measures.

 

We may even experience a boost to domestic manufacturing activity, but that won’t make it easier for transportation and procurement teams managing the surge of irregular and unplanned moves.

And just when the volatility seems to be under control, trans-Pacific trade may begin flowing again, triggering a wave of Chinese imports into the same U.S. ports currently struggling with dramatic reductions in volumes.

Why is that a problem? Low inbound volume from China means less turnover of containers. As the backlog of exports continues to grow, port congestion gets more snarled with both empty and loaded containers.

 

We see multiple sources of market volatility that each have the potential to create a surge in unplanned volume over the next couple of months:

  • Truckload surges for medical, hygiene and foodstuffs
  • New export markets
  • New vendors to replenish inventory
  • U.S. port congestion

 

Since we recently entered the inflationary leg of the U.S. truckload market capacity cycle, the industry does not have the same flexibility to adjust as it did in 2019.

This means that the routing guide pressure that we had originally forecast for later in Q2 2020 could arrive early.

 

The Long-Term Coronavirus Impact: 2 Potential Scenarios

A lot has changed in the few weeks since I presented our Q1 forecast. In light of the COVID-19, have we changed our inflationary forecast? The short answer is no.

While we believe all the aforementioned factors will have a profound impact on the truckload market in the short-term (2-3 months), we believe that the long-term impact of the COVID-19 outbreak will depend on the U.S. consumer.

 

A lot has changed in the few weeks since I presented our Q1 forecast. Have we changed our inflationary forecast? The short answer is no.

 

In our Q1 forecast, we outlined two scenarios: one with an economic recession, and one without. The two most likely COVID-19-related disruption scenarios fit within that narrative, and basically map out along the same lines.

Here are what we view as the two potential scenarios for the long-term impact of the coronavirus, and what each could mean for the U.S. truckload market.

 

Scenario 1: Virus Containment, Economic Rebound

Employees get back to work, producers get back to producing, and consumers continue to consume. 

  • A broad quarantine effort in the U.S. is relatively short-lived
  • An effective fiscal stimulus package from the government boosts the economy
  • Employees maintain their jobs
  • The consumer rebounds
  • We avoid a recession

In this scenario, employees get back to work, producers get back to producing and consumers continue to consume. Deferred consumer demand would likely snap back by Q3.

While positive for the economy, the short-term challenges that transportation planners will face will likely become long-term challenges.

Why? The stronger the economy, the higher the spot market rises and the longer the market will stay inflationary, as illustrated by the “stronger for longer” dashed line in the chart below.

 

 

Though influenced to some degree by diesel prices (collapse vs. hold steady) and weather (major hurricanes vs. no storms), this will likely mean lower primary tender acceptance and more unplanned exposure to a tight spot market.

 

Scenario 2: Extended Quarantine, Economic Recession

Federal, state and local governments, businesses, and schools could shut down for several weeks to contain the spread.

  • COVID-19-related containment efforts are extended
  • Employers slow down hiring reduce hours/payroll, and ultimately lay off some of their workforce
  • Government policies designed to support those impacted prove ineffective
  • The consumer does not rebound
  • We tip into an economic recession

 

In this scenario, federal, state and local governments, businesses, and schools could shut down for several weeks to contain the spread.

These more direct impacts could create a permanent dent to consumer demand, as opposed to simply deferring it a quarter.

This would pull down business activity as a result. With a sluggish economy, the peak in spot truckload market rates will arrive sooner and at a lower level than it would in an otherwise healthy economy.

While bad for the economy, the short-term COVID-19 disruptions for shippers would probably stay in the short term, as the spot market peak would be less pronounced.

 

Long-Term Quarantine or Short-Term Containment, We Will Likely Have an Inflationary 2020

We identify 5 key economic indicators that contribute to the likelihood of a 2020 or 2021 recession. The COVID-19 outbreak is just another factor driving these economic indicators (albeit a powerful and unexpected one).

Whether or not the coronavirus contributes to a recession, we will still have an inflationary spot market. If we do have a recession, we’ll just spend less time above the line

An inflationary truckload market and an economic recession are not mutually exclusive phenomena. Look back to 2008 for evidence.

 

We expect a short-term surge in unplanned truckload demand. From there, the longer-term impact will largely depend on the resiliency of the U.S. consumer. 

 

In summary, we expect a short-term (2-3 month) surge in unplanned truckload demand, stemming from a desire to stockpile inventory, an increase in unplanned lanes that arise from inventory shortages, and capacity constraints.

From there, the longer-term impact will largely depend on the resiliency of the U.S. consumer.

Will they spend through the duration of the outbreak? Will spending continue once COVID-19 is contained and eradicated?

Either way, we still predict an inflationary spot truckload market through 2020 — it’s just a question of magnitude and duration.

 

How Shippers and Carriers Can Prepare

For the most up-to-date information about COVID-19, as well as preparedness plans, consult the Center for Disease Control (CDC) and the World Health Organization (WHO).

To help prepare for an inflationary truckload market, we created some resources that you may find helpful:

 

For Shippers:

Read 4 Things You Can Do to Prepare and make sure you’re doing everything you can to out-ship your competition in 2020.

For Carriers:

Read How to Become a Carrier of Choice to get tips that will grow your business in any market.

 

What Coyote Is Doing to Prepare

We are committed to maintaining operational readiness and services in preparation for the Coronavirus Disease. 

We are subscribed to all relevant communications from the Centers for Disease Control and Prevention (CDC) and World Health Organization (WHO). We are monitoring for updates on active cases, status changes, and recommendations.

We are also acting in alignment with the CDC Interim Guidance for Businesses and Employers to Plan and Respond to Coronavirus Disease 2019 (COVID-19):

Coyote is also expanding remote worker capabilities (laptops, voice and video teleconferencing and business application access) to maintain critical operations for shippers and carriers.

For the latest updates on how Coyote is preparing, click here.

If you have any unexpected supply chain disruptions and need assistance covering your freight, we are here to help.

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Chris Pickett, Coyote Logistics Chief Strategy Officer headshot

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