MRO needs rise in logistics and transportation

Jim Haughey, Director of economics for Reed Business Information -- Industrial Distribution, 12/15/2004

MRO opportunities in logistics and transportation are being improved by soaring logistics costs, strained capacity in freight transportation and terminals, and more intense use of warehouses. Logistics operations are reactivating equipment and facilities mothballed in 2001, paying more attention to maintenance with higher replacement costs and quickly adding capacity that will need MRO support.

Logistics costs have soared since early 2004, following three years of near-zero inflation. Less-than-truckload freight rates have increased 7 percent since April. Full truckload rates are up only 4 percent, as many annual contracts have not yet been renewed since diesel fuel prices increased more than 30 percent. Rail, air, ocean and parcel rates have increased similarly. Short-term interest rates to finance inventories have doubled over the same period. Materials handling equipment prices are up 4 percent and still rising strongly. Truck trailer prices are 9 percent higher.

This inflation surge was largely due to sharply higher oil and steel prices.  The temporary physical shortages that caused prices to soar are now over.  Diesel prices will decline 10 percent to 15 percent next year, but no rollback in steel prices is likely. Together with higher demand in a strong economic recovery, logistics inflation will ease from 2004 but will not return to the zero inflation experienced in 2001-03.

Freight carriers are grudgingly adding capacity so they can keep their suddenly higher margins. This keeps pressure on logistics prices and slows deliveries, requiring more safety inventory to be kept. Motor freight operators are also delaying equipment purchases because of a severe driver shortage. Driver wages have shot up 6 percent to 7 percent, but the number of 20-34 year old males is at a demographic low point. Military reserve units and civilian defense contractors have sent 100,000 people from this labor pool out of the country, and construction contractors have hired more than 100,000 people this year.

Ocean ports, air cargo operations and rail intermodal freight service are all experiencing similar barriers to expansion. Shippers report a significant deterioration in freight service availability. Rising freight rates and delayed deliveries will persist through 2005.

Warehousing has not yet experienced as intense inflation and capacity problems, but the warehouse space market will tighten in 2005. The goods share of GDP will expand 5.1 percent in 2005, much faster than the expected 1 percent to 2 percent gain in warehouse space. Materials handling managers increased equipment purchases, especially industrial trucks, by 15 percent in 2004 and will add 10 percent more equipment in 2005 to handle more inventory per square foot. But nearly half of the added spending is to cover higher equipment prices, and much of the rest is to replace equipment retired in 2001-03, so the stock of equipment will be lean relative to inventory into 2006.