The end of long-term transport contracts?

Where are you, carrier?

Saying that road transport in Europe is in chaos is to say nothing. The shortage of carriers is best reflected in the raging freight rates. According to recent calculations by analysts from Transport Intelligence, the average rate index in European road transport has risen by 7% when compared to the previous year. This is obviously a statistical average, as Polish manufacturers and traders often had to pay as much as 20-30% more. Lack of carriers stimulates further increases. Are there any signs of stabilisation?

It seems that at least for the rest of the year the deficit on the transport market will not decrease significantly. The pandemic, rising fuel prices, arrangements of the Mobility Package, the shortage of drivers and eventually the war in Ukraine – have turned the transport market upside down and shaken supply chains. The above-mentioned TI report shows that Polish freight rates have risen the fastest in Europe (especially after the outbreak of the war in Ukraine). Thus, for a full truck load from Poland to the EU one must currently pay around 1,400 euros and not much less on the key European transport route: Warsaw-Duisburg. 

Contracts – a dying service?

According to Michał Pakulniewicz, transport market analyst at Trans.eu Global, the price chaos on the market will persist at least until the end of this year. – Only then will high inflation begin to affect consumption, leading to a marked reduction in demand for transport services. Besides, the European market will suffer from the effects of the economic slowdown in Germany, which is the driving force of the continental economy – he comments. Rafal Jablonski, CEO of System Transport, a company acting as a logistics operator, agrees with this opinion. – Normality will return in a moment, but at a different, higher price level. Contractual transport in the current context is a dying service – Jablonski predicts. Shippers and logistics operators have to expect a high rejection rate for contract shipments: if it is “only” 10-15 percent, they are very lucky. 

– I have recently heard an accurate joke that forwarders tell each other. What’s better: a contract carrier or Christmas? A contract carrier, of course, but Christmas is more often – laughs Rafał Jabłoński. The CEO of System Transport has been working in supply chains for 25 years, his fleet serves all possible directions, but he has never seen such an excess of demand over supply. 

Optimisation as a life raft

Representatives of the transport and logistics sector agree that there is no going back to the situation before the pandemic. And it is not only about the rates, because relations between the shipper and the carrier have also changed permanently. Longer contracts of at least one year are slowly becoming a thing of the past. Today, flexibility reigns on the market. – The only way to reduce freight costs is to optimise solutions, e.g. by making better use of cargo space and extending delivery cycles. Not all goods have to be delivered 6 hours after ordering – comments Rafal Jablonski, System Transport. Both manufacturers and carriers are looking for different solutions to increase flexibility. The former want to save money in order not to lose sales margins as a result of high transport costs, the latter want to make better use of the fleet, compensate for rising costs and earn more. 

The best barometer of the relations between these two groups is the already mentioned rejection rate. Out of concern for their image, shippers do not always share more information about it. However, forwarders have the most complete picture of the freight market. – We sign longer contracts mainly due to the operation of line connections between our branches. Nearly 90% of our business is based on so-called “call contracts”, i.e. current short-term contracts, with reliable carriers. We also supplement the missing transports on the freight exchange – explains a forwarder from a large manufacturing company.

Interpenetration of markets

Increasing flexibility in the approach to transport orders implies greater use of technological tools. This trend towards digitalisation in the transport and logistics sector is also confirmed by recent market research. For instance, the latest report by the SpotData think tank (“Road transport in Poland 2021+”) shows that 42% of carriers plan to invest in the digitalization of processes. In the case of shippers, this process is very much advanced. 

– The contract and spot public markets are condemned to cooperation and friendly interpenetration. Carriers are forced to raise their freight rates not only because of rising fuel prices, but also due to rising costs of driver maintenance and fleet financing. If the National Bank of Poland raises its reference rates, the carrier will pay more for the service of leasing or borrowing the truck. On the other hand, the shipper is seeking to reduce the rejection rate of contractual transports, which is currently as high as 20-25% – says Piotr Roczniak, Business Consulting Manager at CargoON, a company providing technological processes for the transport and forwarding sector.

The market is forcing the shipper to change his operating model because it is him – not the carrier – who is under pressure to ensure continuity of supply. However, manufacturers or trading companies cannot simply afford a radical shift away from contract orders – they are looking for a balance between the two markets. Piotr Roczniak calls it “different shades of the rainbow”, i.e. looking for solutions appropriate to a given situation. – The times when the shipper could negotiate a long contract are over. Today, he must look for the best solution at a given moment. He should monitor spot market prices to adjust contract prices and ensure a low rejection rate. With the right technological tools, he can have simultaneous access to contract carriers, a group of subcontractors and the public market – adds Piotr Roczniak

Times of the Black Swans

Unstable freight prices, weekly fuel adjustments in contracts, pressure for higher rates for drivers – these are the challenges that the transport and logistics market participants will have to face in the coming months. A flexible reaction to the market situation, capacity from various sources – as quickly as possible, without overpaying – is the solution not only for the next few months. – At the moment the only stable element of the transport market is constant change. Chaos is growing – says Michał Pakulniewicz, transport market analyst at Trans.eu Global. 

Piotr Roczniak uses the metaphor of the Black Swan to refer to the current situation and to confirm the thesis of his predecessor. It is a term introduced several years ago by Nassim Nicholas Taleb, an outstanding statistician and economist. – The point is that forecasts often fail, because some unpredictable phenomena occur. The transport market and the economy as a whole are constantly plagued by such Black Swans – he adds. 

Flexible shipper

• 
• Piotr Roczniak
• Head of Business Consulting w CargoON
• – Due to the high transport rejection rate, shippers are forced to look for carriers on the public market. We live in times of constant change in which manufacturers are changing their business model. Since they cannot afford a sudden withdrawal from contract orders, they try to find the missing capacity on the spot market. With the right choice of technological tools, they can make efficient use of access to both markets at the same time. And importantly, without any loss in quality of service.

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