The cost pressures on firms providing road transport services have increased substantially in the last two years, driven by a combination of higher costs for capital, fuel, and labour. The cost of transport equipment, particularly for the heavier commercial vehicles typically used for commercial road transport, has risen. In addition to this increase in equipment costs, fuel prices and wages have risen, driving up the running costs for a road transport business. We anticipate some of these pressures will ease in 2023, but some cost rises may persist, keeping road transport costs elevated.

The costs faced by providers of road transport services have increased significantly since the end of 2020. Chart 1 shows road transport costs, as measured by the Producers Price Index. Road transport costs were up 19%pa in the September 2022 quarter, and have increased 26% since the December 2020 quarter.

Road transport costs have swiftly increased since the end of 2020, driven by a multitude of factors. Capital costs have risen, with the cost of transport equipment, particularly larger commercial vehicles, increasing rapidly in 2022. Alongside higher capital costs, running costs have increased, with fuel prices and wages up substantially over the last 18 months.

Road transport firms face higher capital costs, with the cost of transport equipment up 4.6%pa in the September 2022 quarter. This increase is a marked turnaround in the direction of cost pressures, as road transport costs were easing before the onset of the COVID-19 pandemic, falling 2.8% between December 2012 and 2019. Road transport vehicles are generally at the heavier end of the market, and the cost of heavy commercial vehicles rose 8.0%pa in September 2022, suggesting road transport firms are facing higher cost increases than other transport-related businesses. The cost of heavy commercial vehicles has been increasing since mid-2015, up an average rate of 1.2%pa between March 2015 and December 2020. However, since then the rate of cost increases has accelerated, averaging 3.2%pa since March 2021. Chart 2 demonstrates the increases in transport costs, and the relatively stronger rise in the cost of commercial vehicles, using the Capital Goods Price Index.

Ongoing weakness in the global supply chain for new vehicles, combined with rising production costs, suggests that higher costs for heavy commercial vehicles may persist in 2023.

Everyone knows fuel prices skyrocketed in 2022, as the production and export of oil was hindered by ongoing COVID-19 effects, the war in Ukraine, and reductions in OPEC targets. As a result, the price of petrol and diesel went berserk – on a quarterly average basis, petrol and diesel prices increased 33% and 82%pa respectively in the June 2022 quarter. A huge rise in diesel prices increases running costs for road transport firms. New Zealand diesel prices are outlined in Chart 3.

It’s important to note that, since March 2022, a $0.25/L reduction on the fuel excise duty and a 36% reduction in road user charges were in place. These were temporary policies attempted to ease cost of living pressures, and the New Zealand government have announced both will be rolled back, with full road user charges returning from 1 February 2023. The reduction in the fuel excise duty will be removed in stages, with half of the $0.25/L reduction being reinstated on 1 March 2023 and the remainder on 1 April 2023. The reduction in taxes and charges helped to mitigate the cost to consumers and business of fuel price increases, and the reinstatement of these taxes and charges poses an upside risk to domestic fuel prices in 2023.

New Zealand’s COVID-19 border restrictions limited access to foreign workers over the last two years, which resulted in a labour shortage from mid-2021. The road transport sector was already under pressure with a limited driver workforce before COVID-19, and difficulties finding labour exacerbated these challenges.

With the unemployment rate falling to a low of 3.2% in 2022 and remaining low throughout the year, firms had effectively tapped out the supply of domestic labour, driving negotiating power into the hands of current and potential employees. Firms were forced to pay higher wages to attract workers, resulting in strong wage growth in 2022.

Chart 4 shows the increase in wages for the transport industry, with a 7.1%pa rise in the September 2022 quarter.

Freight volumes peaked in June 2021 but have since eased 5.9% from this peak. Despite this decline, freight volumes are now back around pre-pandemic levels, with volumes in June 2022 only 2.4% below June 2019 freight volumes – and 2.4% above June 2018 volumes. Chart 5 shows the recent easing of freight volumes using Infometrics Freight Volumes Index.

The anticipated economic downturn will limit business spending and investment, and will also weaken consumer spending, which may result in freight volumes falling further in 2023. An economic downturn will also increase unemployment, which will ease pressure in the labour market, likely slowing wage growth in the transport industry in the future.

However, despite a less intense outlook for demand and wages, other cost pressures seem likely to persist. Fuel prices are expected to remain elevated, with the widening of refining margins for diesel less transient than initially thought, along with the effects of the Ukraine war and US production constraints. Crude oil prices have provided some respite, with global recession fears hitting future oil demand, but domestic diesel prices at the start of 2023 remain around 24% higher than the same time in 2022.

Higher costs along the new vehicle supply chain will be persistent. Vulnerabilities exposed by the COVID-19 pandemic are being shored up, which involves higher costs for vehicle manufacturers, such as larger investment in semiconductor manufacturing. These higher costs will be passed on to purchasers, keeping prices for vehicles elevated. The additional logistical challenge of manufacturing and shipping heavier commercial vehicles, may pose further upside risk to the cost of heavy commercial vehicles, compared to other types of transport equipment.

We will fully outline our expectations for the transport sector and wider economy in our February Transport Forecasts, which will include our outlook for the commercial vehicle market, fuel prices, and the labour market.