Canadian Shipper


The FX Effect: Navigating the volatile world of cross-border trade

Canada and the United States share the world’s longest border, stretching 8,891 kilometers across land and water. They also share what is perhaps the world’s largest bilateral trade relationship: in 2014 bilateral trade of goods and services totaled just over C$800 billion dollars, equivalent to C$2 billion crossing the border or C$1.4 million every minute, according to the Canadian Federation of Independent Business’ Beyond the Big Border survey.
After previously falling behind Mexico, Canada has regained its historical rank as top trade partner with the U.S. U.S.-Canada freight was valued at $45.1 billion in November 2015.
This was down 13.8% from a year earlier as all modes of transportation also carried a lower value, noted the Bureau of Transportation Statistics at the U.S. DOT.
Lower crude oil prices contributed to the year-over-year decrease.
Trucks carried 60.4% of the freight to and from Canada, followed by rail at 16.3%.
The top commodity category transported between the U.S. and Canada by all modes was vehicles and parts, of which $5.4 billion, or 59%, moved by truck last November.
Increases in the value of the U.S. dollar against both Mexican and Canadian foreign currencies has contributed to year-over-year declines each month through 2015’s reported numbers, and the exchange rate challenge could well rate as the top issue for cross-border players in 2016.
The foreign exchange rate has been a huge economic change factor for trade and for freight in general, said Rick Heywood, Ryder System Inc.’s Director of Customer Logistics in Canada.
“We hear from our Canadian customers that they are looking for some relief on U.S. carrier bases, if they have to pay in USD. The Canadian customers that also distribute in the U.S. kind of offset a little bit of that with the return on their distribution profits. We’re also building some networks for them as well as trying to build more effective supply chains to get to their customers,” he said.
“I have several customers that are taking advantage or have been trying to take advantage of the dollar for six to eight months, hiring more salespeople in the U.S. to put some feet on the street to get more U.S. sales. Those people are leaning on us to engineer networks, consolidate loads, to get them to reach a little bit further into the U.S., to take advantage of that strong U.S. dollar vs. the Canadian product,” Heywood said.
The increase in equipment costs of about 50% has certainly got private fleets thinking twice about investing in capital and transportation when their specialty may be manufacturing or distribution.
“It’s obviously equally as difficult for companies like Ryder in replacing their fleet with significant capital. Right now, in speaking to other colleagues the sales are really going to slow down as they choose not to refleet. Hopefully the FX normalizes over the year,” Heywood said.
Shippers need to understand how their carrier base has costed the cross-border lane, said John Kelly, Transplace’s President of International (covering Canada, Mexico, air and ocean),
Fuel prices have been fast decreasing, but shippers tend not to get to this rapidly enough, Kelly noted.
“They should have their finger on the pulse of fuel and look for carrier adjustment as well,” he said.
A lot of core manufacturing goods and lots of commodities are now trying to source in the Canadian market vs. buying U.S. goods.
“At some point, you’ve got to think where the consumable side of the Canadian economy is, pulling back from the U.S. How much can the Canadian side support that demand until the inventory runs out?” he said.
Kelly sees capacity staying fairly generous.
“I don’t think capacity will make a swing either way. The strength of the U.S. dollar is what’s hurting the Canadian dollar. What we would like to have is if the dollar can stabilize at 72-73 cents, as this allows us to manage better. The five to seven point swing in one month, as occurred in January, makes it hard to recover. I think that historically, good businesses don’t react on a monthly swing. One month is an anomaly, not a trend. But it’s also important, from a 3PL standpoint, when markets flush like this, that shippers gravitate back to ‘care and control’ mode. They are in the buying position but it will flip back around,” he said.
Most of the 3rd party relationships have a very fluid contract so you’re always incented to keep ahead of the market, Kelly noted. Good 3PLs have their eye on exchange rates and capacity all the time, he added.
As shippers navigate through the exchange rate fluxes, it will help “If you can find a way to take foreign exchange out of your equation and get absolute clarity on cost, and work with your carrier partner on how to manage to remove exchange as a variable,” Kelly said.
“Whenever anyone has to factor in exchange you know there is a buffer. Everyone is hedging the risk and it’s a big variable, with 18% swing in 2015 from the Canadian to the U.S. dollar,” he said.
“I think we’re going to see a different world in 2016 if the dollar stays where they’re forecasting it to stay. Capacity is already a concern. It’s been a concern with the driver shortage for the last year, year and a half here in Canada. We’re also seeing Canadian-bound freight is diminishing, as companies choose to import less, try to import closer to a just-in-time (scenario) rather than having product always ready to go,” said Heywood.
“I do believe the dollar is going to create a new dynamic to trade this year. We’ve seen it and we’re living it every day. We don’t have to reignite the conversation on driver shortages but that’s still a pain point for us here as well as every other carrier and colleague I speak to,” he added.
While the border is a “moving target”, said LTL carrier Polaris Transportation President Larry Cox, “cross-border trade is all we do.”
“Every shipment we move is a cross-border shipment, so our perspective is different. The biggest effect on us is not the border itself,” he said.
Cox noted he has 15 people in-house just to manage shipments, to make sure freight goes through.
In an effort to increase sales south of the border the company has hired some high end people in the U.S., including a Director of Traffic and Pricing who will be responsible for Polaris’s Canadian and USA traffic and pricing requirements and Polaris’s recently purchased TCG Transportation Costing software.
Just before Canadian Shipper went to press, the company had introduced a new premium LTL service offering – Priority Plus, guaranteeing delivery by noon the next day from the Greater Toronto Area, to Chicago and New York City.
“Our goal is to become a North American carrier primarily but we were way behind in systems and processes. Every customer wants absolute ease of use from every supplier. We were always catching up-we didn’t have the technology in place the Americans do, and frankly we didn’t need to. We did well in Canada. Our investment in IT is way way up, it has to be. That’s what the big American competition does,” Cox noted.
“We do so much cross-border business we have become a go-to source for the government, which is hopeful that the lower Canadian dollar will spur on more manufacturing activity, jobs and exports,” said Jon Saunders, CEO at Polaris Global Logistics.
The Bank of Canada recently queried Polaris on how the company sees its trade patterns have been changing with respect to the exchange rate, Saunders said.
“If you were a customer importing from the U.S., you now are looking to export to the U.S. It’s creating more conversations with our care team, and with customs experts, as people are looking for more advice. All of a sudden sales are good for us, albeit at a very challenging period last year. We continue to bring on a lot of new accounts,” he said.
“The net effect of the dollar on us is negative-the way we do business is we buy a lot of U.S. currency to bear U.S. partners, and it is a network that we’ve developed. On the positive side, with the manufacturers in Canada, the ones that are left, we are seeing some increase in their volumes. We are gaining market share, which is really our only growth. We think our future is tied in with that,” said Cox.

While the exchange rate flux increases the volatility of the cross-border trade environment, government regulation continues to be another challenge stakeholders face going forward.
The Chamber of Marine Commerce, in identifying its top priorities for 2016, noted it would like to see harmonized regulations across borders and the reduction of red tape, and lower fees for government-mandated services.
“Our customers are critical to the viability of Great Lakes-Seaway shipping and the underlying economy. As one of our large industrial customers put it: No customer = no ships, no ports, no Seaway,” says Stephen Brooks, President of the Chamber of Marine Commerce.
“We use the Great Lakes-Seaway to ship 75 percent of our product from our Ojibway Mine in Windsor. It’s crucial to our company that the U.S. and Canadian Coast Guards have the equipment and resources to effectively manage the ice during harsh winters,” said Francois Allard, K&S Windsor Salt’s Vice-President, Administration.
Cost-effective regulations based on “sound science” will be key for St. Lawrence Seaway customers.
Otherwise, if ballast water regulations unreasonably increase costs, it will hurt the Seaway and all of the industry that depends on it. If the Seaway gets even $2/per metric ton more expensive, significant volumes of Prairie grain could move west or south instead. It doesn’t seem like very much, but those are the margins in the grain trade,” noted Ward Weisensel, SVP of Trading, Procurement and Risk with G3 Canada Ltd.
At press time, the Canadian Trucking Alliance had just released a white paper recommending a “made-in-Canada, SMART (Safe, Managed, Adaptable, Reliable, Tested) approach toward implementing the proposed Phase II GHG (greenhouse gases) Reduction Standards and fuel efficiency regulations for heavy trucks and – for the first time – trailers.
The Phase I standards which were introduced in 2013 covered tractors and engines from model years 2014 to 2018. Phase II, will encompass the entire vehicle – tractor, engine and trailer.
“At no time in our industry’s history have carriers’ economic goals been more aligned with society’s desires in terms of carbon emissions reduction than they are today,” said CTA president David Bradley. “Even with current lower prices, fuel is the second largest operating cost for truck fleets so it is in the industry’s interest to improve fuel economy while also further reducing its carbon footprint.”
Bradley has stated that Canada’s reliance on trade, especially with the U.S., for its economic well-being goes without saying, and that CTA is onside with the aims of the Phase II regulation. But it does not want Environment Canada, as it has done in the past and which it has indicated it is planning to do again, to “simply adopt whatever the US Environmental Protection Agency decides to introduce to the U.S. fleet.”
The U.S. fleet is standardized around one configuration whereas in Canada a vast array of much more productive, efficient and innovative multi-axle configurations, trailer body styles, and higher allowable weights are allowed.
When payload is considered, the Canadian fleet is 22 per cent more fuel efficient and produces 22 per cent less GHGs than the U.S. fleet, CTA said. In addition, Canadian operating conditions – the climate, topography, distances – are very different than in most parts of the United States and require equipment and technologies that have been tested and certified for use in this country.
“Simply taking the U.S. rule and imposing it on the Canadian fleet would be at odds with the goal of reducing GHG emissions from the sector and would undercut Canada’s superior productivity and environmental advantages developed over the past 40 years,” Bradley said. “It would force equipment on Canadian carriers that is potentially either unsuitable or untested for Canadian conditions and which could expose Canadian drivers to unsafe situations.”

To support the volume of trade moving by truck back and forth across the Canada-U.S. border, the Canadian Trucking Alliance lobbied the U.S. Customs and Border Protection (USCBP) to allow commercial vehicles to ship Canadian domestic goods in-transit through the U.S. using a limited data set at select ports of entry. This followed a January 10 incident that saw bolts break on the newly constructed Nipigon River Bridge, which carries both Ontario Highway 11 and Ontario Highway 17, designated as part of the Trans-Canada Highway, across the Nipigon River near Nipigon, Ontario. The break occurred only 42 days after the bridge was opened to traffic, and is still under investigation by Ontario’s Ministry of Transportation.
(While it has been technically legal for Canadian carriers to move Canadian goods in-transit through the United States, the move by USCBP post 9/11 to treat such shipments as international in nature effectively choked off the ability to move freight with an origin and destination in Canada via the southern route through the United States. In order to conduct in-transit shipments through the United States, a trucking company would have to provide eManifest data to USCBP prior to arrival at the border, including the value for each shipment on board – a major obstacle since such data is not generally available from shippers for what is really a domestic shipment. The problem is particularly acute for less-than-truckload (LTL) carriers who consolidate the goods of many customers for shipment.)
CTA hailed the CBP’s decision allowing highway carriers to enter the United States between at Port Huron, Detroit or Sault Ste. Marie, MI; International Falls or Grand Portage, MN (between 8 am and 4 pm); and Pembina, ND.
“Getting people out of their cars is a key part of the solution to relieving congestion, but there is consistently little attention being paid to goods movement strategies, nor does it address the fact we’re the only major industrialized country on the planet not to have a national highway policy,” CTA president David Bradley has said. “The recent problems at the Nipigon River Bridge in Ontario underscore the need for the federal government to provide dedicated support of roads and bridges.”
The accepted bond value or $2.00/pound default value is the result of successful discussions between CTA and USCBP to identify means to reinstate the Canadian carriers’ ability to transit through the U.S. with Canadian domestic goods – a commitment under the 2011 bi-national Beyond the Border Action Plan. A pilot to test the data and compliance is slated to start early in 2016, but with the Nipigon bridge scenario, USCBP has opted to provide highway carriers the opportunity to take advantage of a version of the program now.
In the meantime, USCBP has made it clear this is only a temporarily contingency solution in response to the bridge closure. Once the bridge has been repaired and is functioning per usual, the in-transits using the limited value data will not be allowed to proceed. Once the pilot is launched, in transits using the limited value data will be restricted only to known pilot participants.

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