Transportation Costs to Rise Further

Think trucking rates are high now? Wait till next year.

By Jim Ostroff, Associate Editor, The Kiplinger Letter

August 26, 2008

Despite lower fuel prices next year, truck shipping will cost more for most businesses in 2009 than this year. Rate hikes of 8% to 9% will hammer firms, as the environment shifts from a buyer's market to a seller's market. Sluggish business demand throughout this year has kept rate hikes to a mere 2%, but it's also shrinking the trucking industry. About 3500 firms will shut down, while others are curtailing operations, with many even selling off some of their big rigs to buyers overseas. As the economy starts to pick up in coming years, capacity will be strained.

With diesel prices likely to remain over $4 a gallon (though averaging about 15¢ a gallon less than this year), hefty fuel surcharges won't disappear. In fact, manufacturers are beginning to slap extra fees for shipping costs onto their invoices: Dow Chemical, for example, is adding a $300 charge for each load it ships to customers by truck and $600 for each load it transports via rail, regardless of the cargoes' weight. Others are simply boosting their prices wherever possible. The trend spells higher inflation in wholesale prices and tough times for those close to the top of the supply chain. Super-intense competition for consumer dollars means that retailers, auto and appliance makers will be unlikely to pass along increased freight costs to their customers.

Negotiating a multiyear shipping contract now could pay off. Though rates won't look much like bargains, they'll probably prove a good deal down the road. To get the best rates, small companies operating within the same town or region should try to pool their freight shipping to get more clout with trucking firms.

Some manufacturers are investigating another route to lower shipping costs: "Made in America" is regaining popularity. With shipping tabs soaring, more manufacturers and retailers are looking inward rather than across borders. Now at about $9000, the typical cost of transporting a cargo container from China to the U.S. is three times what it was in 2003. The ocean freight cost adds the equivalent of a 10% duty to the price of goods imported from China and other Asian nations and nearly as much on cargo from Latin America, eastern Europe and the Mideast.

With no chance of oil prices slipping to pre-2007 levels of about $75 a barrel, manufacturers are again becoming enthusiastic about stateside production facilities. Firms such as Crown Battery, Volkswagen and Ikea plus steelmakers ThyssenKrupp and SeverStal are building new plants here or beefing up output at older facilities. In fact, the process is part of a growing counter trend to outsourcing. "Nearshoring is gaining favor with many companies because they can save transportation costs and get faster delivery times by sourcing components and finished products in the U.S., rather than in Asia, or other distant countries," says Foster Finley, managing director with Alix Partners, a consultancy.

Domestic food retailers are accelerating a shift to local produce and other products to counteract escalating costs for ocean or air freight shipping. Out-of-season fresh flowers, fruits and vegetables such as Peruvian roses, Chilean grapes and sea bass, Belgian chocolates and Australian apples won't disappear from supermarket aisles: American consumers are too used to getting favorites year-round. But they'll be less common and pricier.

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