Here are few statistics to consider. On June 27, 2014 a barrel of crude oil cost $107.26 U.S. On the same date, a gallon of diesel fuel cost $3.91 in the U.S. or $1.35 per liter in Canada. The cross-border (Canada/U.S.) fuel surcharge was 20.1 percent on LTL, 47 percent on truckload.
Last week, the price per barrel dropped to $50 while the price of diesel fuel fell to $3.13 in the U.S and $1.18 per liter in Canada. The cross-border fuel surcharge fell to 13.4 percent on LTL and 31.6 percent on truckload. This week the cost per barrel is trending below $50. The cost per barrel has dropped by over fifty percent in the past six months. In the same period, fuel surcharges have declined by about a third. Here are few thoughts that shippers need to keep in mind.
1. Shippers will receive a freight cost saving windfall in 2015
An energy expert suggested this week in Forbes magazine that we may see the cost of a barrel of diesel fuel fall to as low as $20 this year. While no one knows what the bottom is or how long energy costs will remain at these levels, the end result will be an unexpected cost saving bonanza for shippers. Enjoy it as long as it lasts.
2. What comes down will go up
A quick look back at history will tell you that energy prices always rise after one of these downturns. Here is another way to look at the market dynamics. If your company manufactured a product for $10 (the estimated cost per barrel for Saudi crude oil) and could sell it for $110 a unit, would you want to continue selling it a $20 a unit? Keeping in mind that the raw materials for this product have a finite life, once you get rid of some of your high cost competitors, wouldn’t you want to go back to selling your product at higher margins? These low energy prices will last for a specific period of time but can change rather quickly (viz. look at how quickly they came down).
3. Fuel surcharges are not all created equal
Many carriers have their own fuel surcharge formulas. There is a lag between the decline in the cost per barrel of crude, the cost at the pump and the fuel surcharges assessed by carriers. Shippers need to be on alert for how quickly and effectively carriers are reducing their fuel surcharges.
While many Canadian companies use the FCA (Freight Carriers Association) formula (or a modified version of it), the actual amount shippers will pay can be negotiated. It is common to see manufacturers, particularly those with volume, paying 75 or 80 percent of the proposed FCA fuel surcharges. In other words, fuel surcharges, even if they are reduced, are negotiable. The decline in the cost of diesel fuel should not stop shippers from negotiating fuel surcharges, even if they are at the lowest level in years.
4. Watch out for a barrage of freight rate increases in 2015
Unless you have been in hiding the past year, we all know that this is the year dimensional LTL pricing will hit the U.S. market in a big way. The driver shortage will not disappear anytime soon. If the economy continues to improve, there will be capacity shortages. If fuel surcharges come down, carriers will be more inclined to be aggressive in seeking freight rate increases under the guise of capacity shortages and the need to upgrade their fleets.
Key Takeaways
The bottom line is that fuel surcharges, that at times have represented a third of total freight costs, will come down significantly in 2015, at least for part of the year. This will serve to reduce overall freight costs. This could make some shippers complacent or passive in negotiating freight rates (and fuel surcharges). In 2015, shippers need to be very vigilant in managing freight costs.
Under the “smoke screen” of declining fuel surcharges, there will be much momentum for carriers to raise freight rates. When the cost of diesel fuel and the associated fuel surcharges start to rise again, as they definitely will, carriers are not going to give back any rate increases they can secure this year. Don’t be a complacent shipper. Challenge every rate increase. Keep working on the fundamentals of freight management – improve your packaging, conduct your RFPs, negotiate aggressively and intelligently, improve weak and ineffective processes, collaborate with your good core carriers and form long term partnerships. These are the actions that will protect your company’s bottom line over the long term.
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