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The Shippers' Dilemma With Forecasting Fuel Expenses in a Volatile Energy Market
Staying on top of fuel expenses can be crucial for businesses struggling with high operational costs in a plateauing retail economy. But fuel price forecasting can be pretty challenging.
A hearty welcome to the 78th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
The US retail economy is going through some challenging times. While the underlying freight industry has been hemorrhaging toward a recession, the same cannot be said of the retail sector, where demand has remained lukewarm, with some segments being better off than others.
However, US imports, a forward indicator of consumption, have shown a revival, as March imports showed an uptick month-over-month and above 2019 levels. Nonetheless, increasing imports might not necessarily translate into better fortunes for the retail industry as they impact upstream retail inventories (inventories moving to warehouses) more than downstream inventories (fulfillment related).
In that context, tracking inventories and sales ratios could have a more considerable bearing on the retail economy’s health as it helps better understand the consumption part of the equation. However, there’s little to cheer about in there. While general merchandise retailers had a comparably better start to the year than retailers dealing in building materials, the inventories to sales ratio for both segments remains much higher than pre-pandemic norms.
Trucking market data support this. The Cass Freight Index saw its shipments component fall 1% month-on-month in March and 4% lower than a year ago. For carriers, this is not great news to chew on, considering freight rates have also stayed low (albeit might be closer to the bottom), and excess freight capacity is not draining out of the market quickly enough.
While this is a fair-weather scenario for shippers as they can buy freight space cheaply, the concern squarely rests on the demand side, which has been a letdown so far this year. In realistic terms, retail might not pick up for a while. Retailers face operational costs way higher than pre-pandemic levels, with everything from labor and warehousing to equipment maintenance costs being more expensive.
Retailers face operational costs way higher than pre-pandemic levels, with everything from labor and warehousing to equipment maintenance costs being more expensive.
Today, we will focus on fuel expenses, a volatile quotient that has continued to fall in pricing since its heights last year, and its impact on shipper operations.
“The softening freight demand has affected diesel prices, indicating the volatility will continue. Consumer sentiment, inflation, Fed interest hikes, and geopolitical issues are also factors that make it harder for shippers to understand where the fuel prices are heading,” said Jenny Vander Zanden, the chief operating officer of Breakthrough, a freight data analytics firm with a focus on fuel recovery and optimization.
Shippers look to forecast their fuel expenses every fiscal year for several reasons, even if they plan to lease freight capacity in the market. By estimating fuel costs, shippers can plan their transportation budget more effectively, enabling them to avoid overspending and negotiate competitive freight rates with carriers.
This is easier said than done. Since freight predominantly runs on contracts signed way before the actual move, carriers add fuel surcharges to the total freight cost to reflect periodical fuel price increases. For the shipper, not planning for fuel price volatility would leave them at risk of incurring unexpected expenses that could affect their bottom line.
For the shipper, not planning for fuel price volatility would leave them at risk of incurring unexpected expenses that could affect their bottom line.
“The energy market is susceptible to change, based on factors like market fundamentals, supply and demand, and underlying drivers of complex factors in refining. It’s also about being aware of political influences, particularly given the current climate,” contended Vander Zanden. “This requires a deeper understanding of the market. At Breakthrough, we analyze the market to help our clients stay informed about the energy market trends.”
Either way, forecasting needs to be dynamic, and shippers must continually re-forecast throughout the year, comparing actuals to the initial forecasts. Vander Zanden explained that these insights are crucial to incrementally improve forecasting over time.
Aside from keeping a tab on the energy market, there’s an element of forecasting where shippers have to gauge how much energy they will consume over the year — numbers that depend entirely on the strength of their business. “One of the challenges with traditional fuel surcharge programs is that if you ask the shipper how many gallons of fuel they buy, they wouldn’t be able to put a finger on it. This makes them feel out of control as there’s little visibility into that forward-looking projection.”
There’s also the added complication of fuel prices varying across states, which could result in a difference of 40-50 cents per gallon in fuel costs on any given day. For companies that run a mix of private and dedicated fleets, for-hire options, and intermodal, the permutations can be overwhelming.
“Fuel costs can significantly vary based on freight requirements as well. The best approach for shippers is to first consider the unique requirements of their freight, structure their transportation modes and mix, and then build a fuel strategy that dynamically changes based on each market at a lane-specific level,” said Vander Zanden.
“The best approach for shippers is to first consider the unique requirements of their freight, structure their transportation modes and mix, and then build a fuel strategy that dynamically changes based on each market at a lane-specific level.”
“Carriers, be it dedicated or for-hire, purchase fuel in the markets where they operate to move freight for the shipper. So it’s essential to create a reimbursement system that aligns with the markets they travel through and the freight requirements. For instance, a refrigerated shipment would require reefer fuel, which would differ from a dry shipment. Aligning the reimbursement mechanisms will help assessments stay closer to reality.”
While there is no definitive science to nail fuel consumption forecasts down to the exact numbers, following a structure and being aware of all the parameters impacting the fuel budget will help companies stay on top and avoid unexpected expenses. With fuel expenses making up a significant portion of overall logistics costs, shippers will do well to keep an eye out for ways to improve forecasts.
The Weekly Roundup
Q1 ‘23 earnings have dropped considerably for ocean freight giant Maersk as demand continues to drop in the West. Many retailers are still processing an inventory glut, the last holdover from the pandemic. While this is expected to ease by Q2, which will help, freight volumes are continuing to contract.
The alliance between Shopify and Flexport has grown deeper with the recent, mutually beneficial sale of Shopify’s logistics and last-mile delivery branch to Flexport. Shopify has spent the past several years cultivating its logistics capabilities. The sale was finalized with a transfer of 13% of Flexport’s shares going to Shopify. This is the most recent step of many in an effort to compete against the likes of Walmart and Amazon.
There have been some wild fluctuations in the sale of used Class 8 vehicles. The overall volume of sales is down 20% year-over-year, while the month-to-month sales volume has increased by 14.8%. The tanking freight market understandably caused a considerable increase in deprecation for used vehicles. It is expected, however, that the market will begin to stabilize this summer.
A freight rebound, which has been predicted for the second half of 2023, is becoming increasingly unlikely. The combination of rising inflation and dropping demand in the U.S. economy has led to a fallout of US imports. While peak shipping typically begins late summer into early fall, market indicators point to less promising signs of a recovery.
“A large amount of new construction scheduled for delivery this year will cause some spikes in vacancies across the US but should be fully absorbed by late 2024.”
- CBRE, in its industrial report on the increase in availability of warehousing space when currently under-construction space comes live next year
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