Freight markets see little change this week

This week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Last week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 35 (Shippers)

The FreightWaves Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.

This week’s Pricing Power Index is based on the following indicators:

Volumes fail to budge the needle

Freight demand stagnated among the major markets this week but did see a boost from a handful of smaller seaport markets like Savannah, Georgia. The broader picture of the market remains largely unchanged, however, as retailers continue to face a lull of consumer demand while sitting on top of high inventory levels. While it is possible that volumes might take a further hit from Hurricane Ian, it is (at the time of writing) somewhat dubious that inclement weather will tip the scales one way or another.

This week, the Outbound Tender Volume Index (OTVI) fell 0.88% on a week-over-week (w/w) basis. On a year-over-year (y/y) basis, OTVI is down 25.22%, although y/y comparisons can be colored by significant movement in tender rejections. OTVI, which includes both accepted and rejected tenders, can be artificially inflated by an uptick in the Outbound Tender Reject Index (OTRI).

Contract Load Accepted Volume (CLAV) is an index that measures accepted load volumes moving under contracted agreements. In short, it is similar to OTVI but without the rejected tenders. Looking at accepted tender volumes, we see a decline of 0.96% w/w but also a fall of 10.4% y/y. This y/y difference confirms actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI to lower levels.

This week, the biggest story in the news media is the destruction — both already seen and anticipated — resulting from Hurricane Ian, which made landfall in Florida on Wednesday afternoon. By Thursday, the hurricane had weakened to a tropical storm as it passed over central Florida and made its way to the Atlantic Ocean. At the time of writing, Ian had regained its hurricane status and was expected to make landfall near Charleston, South Carolina, by Friday afternoon.

Florida is primarily a consumer state (also known as a backhaul market), given that it has a small manufacturing base compared to other states in the region. The one exception to this designation is the winter citrus season, as Florida produces roughly 70% of the United States’ citrus. It is true that this year’s harvest will likely face challenges from flooding and strong winds, though it is doubtful that this crop destruction will have an outsized effect on truckload markets at large.

Of the 135 total markets, 71 reported weekly increases in freight demand, though many of the largest markets suffered steep declines.

Case in point: Ontario, California — the second-largest market by outbound volume — saw freight demand decline 9.6% w/w. Part of this scarcity is due to the dearth of imports seen at West Coast ports, which have given up market share to a historic degree. Dallas and Houston, the nation’s third- and fourth-largest outbound markets, saw tender volumes dip 6.8% w/w and 8.4% w/w, respectively.

By mode: Van volumes were surprisingly robust this week, as the Van Outbound Tender Volume Index (VOTVI) was up 2.28% w/w. VOTVI is nevertheless down 24.06% y/y, but that difference is largely attributable to rapidly declining tender rejections over that same period. Accepted van volumes are, however, down 9.14% y/y.

Reefer volumes are inarguably in a worse spot compared to last week, since the Reefer Outbound Tender Volume Index (ROTVI) is down 3.74% w/w. As is the case with VOTVI, ROTVI is down 31.05% y/y largely because of declining reefer rejection rates. Accepted reefer volumes are actually up 3.95% y/y.

Rejection rates recover slightly from earlier lows

Early in the week, OTRI dipped to a new cycle low of 5.13%, threatening to fall below 5%. Over the past few months, we have seen OTRI run up against several floors, each one seeming to be its final resting place. So while OTRI’s movements might not be particularly noteworthy on a week-by-week basis, they add up to a slow deterioration of market conditions. This drawn-out decline is a battle of attrition for small carriers, especially those that operate primarily in the spot market, as they struggle to find suitable margins to cover ever-inflating operating costs.

Over the past week, OTRI, which measures relative capacity in the market, rose to 5.23%, a change of 7 basis points (bps) from the week prior. OTRI is now 1,656 bps below year-ago levels.

Despite the current trend of loosening, another capacity crunch might be looming on the horizon. The explanation behind such a possibility is straightforward: Given carriers’ aforementioned thinning margins and rising costs of operation, it is likely that we will continue to see an exodus of smaller carriers from the marketplace as bankruptcies thin the herd. Since companies with six or fewer trucks make up an overwhelming majority (about 92%) of carriers, any shockwave among them will be felt in rising spot rates and tender rejections.

Yet the above picture is only half of the overall pincer movement threatening to tighten capacity. Larger carriers will find it difficult to replace aging equipment, as the ongoing semiconductor crisis continues to disrupt truck manufacturers’ supply chains. Running thus on trucks that have expired past their replacement cycle but without a suitable supply of new equipment, large carriers will have to prioritize high-paying loads to offset rising maintenance costs. Given that larger carriers have a strong foothold in the contract market, this trend of aging equipment will place upward pressure primarily on contract rates.

The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. As capacity is generally finding freight, only a few regions this week posted blue markets, which are usually the ones to focus on.

Of the 135 markets, 72 reported higher rejection rates over the past week, though 52 of those reported increases of only 100 or fewer bps.

Atlanta saw rejection rates climb 92 bps w/w, yet the market’s local OTRI is still only 4.55% — a far cry from the peak of 13% seen a few months ago. Nevertheless, volumes in Atlanta are trending up and are currently at levels last set in mid-July.

By mode: Though they remain unstable, reefer rejection rates have recovered from lows near 6.5% set earlier in the month. The Reefer Outbound Tender Reject Index (ROTRI) did fall 28 bps w/w, but ROTRI remains elevated by markets like Houston. Van rejection rates, however, did not tip the scale at all this week, with the Van Outbound Tender Reject Index (VOTRI) holding steady at 5.14%.

Flatbeds could be the star of the week, as the Flatbed Outbound Tender Reject Index (FOTRI) gained 160 bps w/w. Key drivers of flatbed demand, like industrial production and the Purchasing Managers’ Index (PMI), remain elevated, which should provide upward pressure on flatbed rejection rates for the near future. Needless to say, any shock to the industrial economy would be a critical blow to flatbed carriers.

Spot rates climb late in the week

Data from mid-September is showing end-of-quarter decay in contract rates, which are reported with a two-week delay. On Sept. 10, contract rates fell to their lowest level since last year’s Thanksgiving. This downward trend, which has been worsening since early August, is troubling news for carriers as they head into rate negotiations for the fourth quarter. 

Contract rates, which are base linehaul rates that exclude fuel costs and other accessorials, rose 1 cent per mile this week to $2.70. Since contract rates used to be renegotiated on a yearly basis, they proved exceptionally ill-suited to the market volatility introduced by the pandemic. This sluggishness to rapidly changing market conditions led a not insignificant contingent of shippers to negotiate their contracts on a quarterly basis. While these contracts are hammered out and put in place, rates typically rise in the interim. As data comes in from early October in two or three weeks’ time, expect to see contract rates climb slightly before falling later in the month. I fully anticipate a decline in contract rates for the fourth quarter, but I also believe that the next sizable drop will be seen in Q1 2023.

Spot rates performed comparatively well this week, as the National Truckload Index (NTI) rose 4 cents per mile to $2.68. These gains occurred despite data from the Energy Information Administration revealing that diesel prices fell earlier in the week. The true gains of the spot market can be seen in the linehaul variant of the NTI (NTIL), which excludes fuel costs and other accessorials like contract rates. The NTIL rose 5 cents per mile this week to $1.93.

The chart above shows the spread between the NTIL and dry van contract rates, showing the index has continued to fall to all-time lows in the data set, which dates to early 2019. Throughout 2019, contract rates exceeded spot rates, leading to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to record highs on a seemingly weekly basis, while contract rates slowly crept higher throughout 2021. 

Once spot rates started the rapid descent from the stratosphere in late February, the spread between contract rates and spot rates narrowed as contract rates continued to increase throughout the first quarter. This caused the spread between contract and spot rates to turn negative for the first time since July 2020, as contract rates currently outpace linehaul spot rates by 80 cents per mile.

The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, found further room to fall. Over the past week, the TRAC rate fell 4 cents per mile to reach $2.61. The daily NTI (NTID), which has risen to $2.69, is once again outpacing rates from Los Angeles to Dallas.

On the East Coast, especially out of Atlanta, rates did see growth and are still beating the NTID. The FreightWaves TRAC rate from Atlanta to Philadelphia rose 2 cents per mile this week to settle at $2.70. Rates along this lane have been falling since mid-July, when the TRAC rate was $3.48 per mile.

For more information on the FreightWaves Passport, please contact Kevin Hill at [email protected], Tony Mulvey at [email protected] or Michael Rudolph at [email protected].