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Wholesale Banking

European road haulage to adopt slower speed and tighter control

The European road haulage sector has faced a challenging couple of years. After enjoying strong demand and limited transport capacity, the tide has turned.

A bridge build over water is under construction

Consumers have shifted their spending back to services, leading to aftershocks in demand, while international trade flows have faced the impact of the economic slowdown, war-related sanctions, and geopolitical tensions. These factors have sent throughput figures in the seaports of Rotterdam, Antwerp-Bruges, and Hamburg down 6% over the first three quarters of 2023, alongside lower hinterland traffic. In turn, road transport volumes have been pushed into negative territory, and some haulage companies active in manufacturing have had to temporarily idle capacity, which has been rare for years.

However, there is some hope for a mild recovery in 2024. Following a correction of elevated spending on goods, European road haulage is set to see some pick-up. Nevertheless, economic stagnation is curbing the upward potential for volume and investments. In turn, cost control will be plunged into the spotlight, and sustainability will also become a more crucial part of the deal.

Challenges facing the European road haulage sector

European haulage companies are facing a challenging combination of continued rising wage costs, covering up to 50% of the cost bill, and a deteriorated tariffs outlook. Spot rates dropped below contract rates over the course of 2023. Lower fuel costs, accounting for some 20-25%, tempered total costs, but many carriers have hedged diesel price risks in contracts. CO2 pricing also starts off in Germany, which significantly raises charges. All in all, keeping margins up is set to be more difficult.

As soon as demand recovers, structural capacity and available supply of drivers may again prove tight. Therefore, some shippers may also consider securing long-term availability and value sustained relationships with haulage companies, which may help in re-contracting.

Investment updates and opportunities

Following a slowdown in transport demand, economic headwinds, and higher interest rates, the investment climate has clearly deteriorated. But delivery times have improved, and transport equipment is also more accessible now. Still, there remain both positive and negative drivers for investment.

Delayed investments and an aging fleet both create an underlying solid demand for the replacement of transport equipment. With trailers, this is less prevalent due to longer life cycles and a slower pace of technological renewal and greening. Efficiency improvements provide an incentive for carriers to invest. New generation models of trucks are typically 10%-15% more fuel-efficient than the previous generation. Increasing policy pressure to decarbonize transport in Europe will support investment activity. Manufacturers started producing electric trucks in series, and retail clients across Europe aim to start deploying them.

However, sharp rises in interest rates and softened transport demand reduced the urgency to invest. Prices of new equipment have risen sharply and have not dropped materially. Electric trucks are still much more expensive to buy. The shortage of drivers still limits companies' ability to grow in some cases.

Sustainability regulations and focus

On the road to 2030, a range of new regulations are set to come into force, which will sharpen the focus on sustainability for investments in transport equipment. CO2 pricing will be introduced for the first time, and CO2 reporting should provide a push for large corporates and manufacturers to produce zero-emission vehicles.

The emissions profile of transportation is becoming increasingly important. Taking the lead in Europe, Germany will put a price on emissions from 2024 by including the costs in the road mileage charging (MAUT). This pushes up transport rates for EURO VI heavy-duty five-axle truck and trailer combinations by almost 16 cents per kilometer to just under 35 cents per km, resulting in an increase of over 80%. The cost increase benefits the business case for electric vehicles but could also lead to a modal shift to rail in specific long-distance cases. On a European scale, the road transport sector will be submitted to the Emission Trading System (ETS) from 2027. This means that moving forward, companies will need to buy carbon allowances to compensate for emissions.

The European Commission's Mobility Package and the introduction of rules surrounding the return of vehicles to member states have generated much discussion and raised questions over efficiency. Throughout 2023, however, we've seen much of the debate begin to die down. In practice, the impact of these changes appeared to be almost non-existent - and in November, it also emerged that the European Court of Justice would likely cancel the highly disputed return home vehicle element. A repeal would offer trucking companies greater flexibility in optimizing the deployment of internationally operated trucks. As a result, we could begin to see increased efficiency gains, although larger companies have also adapted.

Cabotage rules are also more restrictive under the Mobility Package, which does show in transport activity. The cooling-off period of four days makes cabotage less attractive. As a result, total cabotage in the EU fell to 4.5% from 4.9% in 2022. The new rules are particularly relevant for Germany and Belgium, with cabotage levels doubling Europe’s current average.

Looking ahead: Opportunities for growth

Overall, the European road haulage sector is facing many challenges, from economic headwinds and a deteriorated tariffs outlook to sustainability regulations and a shortage of drivers. However, there are also opportunities for growth, particularly in terms of scaling up and investing in more efficient and sustainable transport equipment. As the industry adapts to these challenges and opportunities, we can expect to see slower speed and tighter control, with a focus on cost control and sustainability.

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