Roadfreight transport operators were slugged with a nasty one-two combination overthe first six months of this year. A slowdown in economic activity weighedheavily on demand for road freight transport services, while soaring dieselprices and surging wage costs put the squeeze on margins. But after a toughstart to the year trading conditions appear to be improving.
The extentto which the slowing economy crimped demand for road freight transport servicesis illustrated clearly in Road User Charge (RUC) and diesel sales data. RUCkilometre and revenue purchases for both medium and very heavy trucks were welldown on year-earlier levels over the first half of the year, while June quartercommercial diesel sales fell 2.1% from the June quarter 2005.
Theslowdown in activity was compounded by surging input costs. Skyrocketingdiesel prices and skilled labour shortage induced wage inflation were theprimary culprits, driving input costs 15% higher over the year to June. Hamstrungin their ability to pass the rising costs on to clients by weakening tradingconditions (output prices rose just 7% in the June year), operators were forcedto absorb the rising costs in their bottom lines.
The heavygoing has had a dramatic impact of demand for new big rigs. First-timeregistrations of new very heavy trucks have plummeted so far this year, withyear-to-date sales in October down some 28% on a year ago.
But anumber of indictors point to an improvement in trading conditions over the pastfew months. RUC purchases have bounced back â€“ medium (2.4%pa) and very heavy truck(2.6%pa) kilometre purchases both recorded healthy annual growth in the Octoberquarter â€“ while diesel sales showed similar improvement, up 2.5% in the threemonths to October on the same period last year.
Operatorshave also received some much welcome relief on the margin front. The price ofdiesel has fallen 29 cents from its $1.28/litre high, and September quarterlabour market data show annual wage inflation in the road freight transportsector slowing to 1.6% â€“ the slowest rate in two years.
The improvingconditions in the road freight transport sector are indicative of the broaderlift in activity throughout the economy. Underpinned by a tight labour marketand persistently high house price inflation, and boosted by the sharp fall inpetrol prices, consumer sentiment has picked up over recent months, bringingwith it renewed retail sales growth. Residential construction activity hassurged, while the strengthening dollar has so far had little impact on growthin the export sector.
The "softlanding" scenario for the economy that these indictors point to is good newsfor the road freight transport sector: demand for freight services is closelytied to the fortunes of the overall economy (see graph below). Combined withencouraging signs of the long awaited increase in forestry exports (Octoberquarter exports from the Port of Tauranga were up 12% on year-earlier levels),our forecast for GDP to expand by 2.7% over 2007 shouldensure steady demand for transport services over the next 12 months.