Volumes, rejections and rates crab walk the market to a low boil

This week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)

Last week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)

Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 40 (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.

The Pricing Power Index is based on the following indicators:

Accepted freight volume is down on both a weekly and yearly basis

Tender volumes have fallen slightly over the past week, though they largely appear to be stabilizing around their current level. This lack of significant activity is itself a worrying sign that freight demand is slowing in response to inflationary pressures. Both the Outbound Tender Volume Index (OTVI) and true shipment flow are below year-ago levels at present.

OTVI fell a negligible 0.48% on a week-over-week (w/w) basis, a sign of stagnation among shippers. On a year-over-year (y/y) basis, OTVI is down 19.16%. Comparisons on a y/y basis can be thorny because OTVI can be inflated by an uptick in tender rejections. At this time last year, OTVI was greatly inflated by rising tender rejections, whereas rejection rates have since nosedived to incredible lows.

Looking at accepted tender volumes, which is OTVI adjusted by the Outbound Tender Reject Index (OTRI), we see a stumble of 1.86% y/y as well as a dip of 0.8% w/w. The y/y picture for accepted volume may not appear too grim, but the overall freight market is historically strong during the run-up to summer. The current limping state of the market, on the other hand, should concern carriers.

Major retailers published a string of disappointing earnings reports for their first quarters. Target did see a bump in revenue in Q1, but also posted serious misses in net profits, operating income margin rates and earnings per share. Comparatively, Walmart reported that its e-commerce segment, which has been the focus of increased attention over the past five years, rose by a small degree in the first quarter. However, Walmart also reported substantial losses in operating income and earnings per share. For retailers stocking their shelves, inflation rose too quickly to adjust sales prices and pass on the higher costs to consumers.

Of the 135 total markets, 65 reported weekly increases as freight demand stirs across the country.

Atlanta was one of the few major outbound markets to post gains in tender volume this week, with demand up by 8.81% w/w. Other key markets were not as lucky: Ontario, California, experienced a 6.38% dip w/w; Harrisburg, Pennsylvania, saw a 5.9% stumble w/w; and Dallas posted a slight fall of 0.69% w/w. One of the worst declines this week was seen by Detroit, which had been ramping up freight demand from increased industrial activity. This week, however, Detroit saw volumes contract by 29.03% w/w.

By mode: Incredibly, reefer volumes continue to fall after dwindling over consecutive weeks. In a normal market, produce season provides upward pressure on reefer volumes from the early summer to the late fall. As it stands now, however, the Reefer Outbound Tender Volume Index (ROTVI) is down almost 40% y/y. While some of the decline can be attributed to a nosedive in rejection rates, accepted reefer volumes are still down 2.55% y/y. Reefer volumes are also down by 1.87% w/w.

Van volumes, meanwhile, drove the general trend of the overall OTVI. Accordingly, the Van Outbound Tender Volume Index (VOTVI) is down 0.72% w/w and a hefty 19% y/y. Accepted van volumes, however, are down only slightly by 1.08% y/y.

Rejection rates halt freefall, but still hovering near floor

OTRI pulled up a slight amount this past week, though it is still too early for carriers to celebrate. Except for the beginning of the 2020 pandemic, OTRI’s current trend marks both the steepest and the longest decline in a non-holiday-affected period.

Over the past week, OTRI, which measures relative capacity in the market, rose to 8.61%, a change of 29 basis points (bps) from the week prior. OTRI is now 1,571 bps below year-ago levels as it remains unshakably in single-digit percentages.

One piece of good news is that the East Coast might not be facing feared shortages of diesel and gas. Two weeks ago, a major truck stop chain had reported instances in the region where diesel had run out at the pump. A report released by the Energy Information Administration revealed that the PADD 1 region (which accounts for all states along the Atlantic coast plus Pennsylvania, West Virginia and Vermont) had critically low inventory of distillate fuel oils, a category that includes diesel fuel and other fuel oils (e.g., for industrial use). That report led to a major and unprecedented spread between futures for New York diesel contracts and their counterparts in the Gulf Coast.

According to the latest report from the EIA, however, inventories of ultra low sulfur diesel jumped by 1.21 million barrels over the past week to a total of 20.4 million barrels. This reported rise in inventory interrupts a string of six consecutive weeks of decline. Even so, PADD 1 diesel prices are still 33.1 cents above the national average, whereas they usually track much closer. Retailers are hesitant to lower their prices at the pump, given the extreme volatility seen over the past few weeks and unpredictability of the near-future market.

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, Michigan and Baltimore posted blue markets this week, which are the ones to focus on.

Of the 135 markets, 75 reported higher rejection rates over the past week as carriers are bearing the brunt of higher diesel prices.

Partly in response to the uncertain availability of diesel on the East Coast, and partly due to an influx of imports at the Port of Baltimore, the Baltimore market posted a spike in rejection rates this week. A different story is playing out in Michigan, where rejection rates also saw a w/w increase. Industrial activity is attracting carriers to the region but is not providing enough volume to sustain them. More significantly, the state is facing severe weather, notably tornadoes, that will disrupt supply chains until they dissipate.

By mode: Despite an uptick in the overall OTRI, reefers were the only mode to post declines on a w/w basis, mirroring decreased freight activity on the volume side. The Reefer Outbound Tender Reject Index (ROTRI) fell 139 bps w/w to 9.38% — its lowest point in two years. Rising diesel prices are especially tough on reefer carriers, since inflationary pressures on produce inputs are outpacing prices for consumers.

While the Flatbed Outbound Tender Reject Index (FOTRI) did rise 62 bps w/w, flatbed rejections are touch-and-go as it is the mode with the least consistent day-to-day trends. Thanks to a stir of industrial activity, FOTRI is also up 586 bps on a y/y basis, the only such mode to be in the black. The Van Outbound Tender Reject Index (VOTRI) rose 44 bps w/w but is still down 1,586 bps y/y.

Vehicle inspections squeeze rates a bit higher this week

Commercial Vehicle Safety Alliance’s (CVSA) International Roadcheck, also known as “Blitz Week,” has come and gone, but the impacts on spot rates are just starting to show up. Over the past week, the FreightWaves National Truckload Index increased by 5 cents per mile to $2.93, the highest level since May 4. The increase coincides with a slight increase in rejection rates over the weekend and starting off the week. With lead times at nearly three days, the impacts of increasing rejection rates on spot rates took some time to catch up, but it finally has.

The NTI, across all of its forms: National Truckload Index – Linehaul Only (NTIL), National Truckload Index – Daily Report (NTID), National Truckload Index – Daily Linehaul Report (NTIDL) and National Truckload Index – Business Day Report (NTIB), experienced similar increases to throughout Blitz Week. 

Prior to Blitz Week, the NTI was trending sideways as the market has found some stability in the past week. With some drivers opting to stay off the road, trying to avoid the risk of a ticket that would likely wipe out a week’s worth of profits and potentially put the truck out of service, upward pressure increased on rates in the back half of the week.

Now with just a week until Memorial Day weekend, how will drivers react to rates that are now nearly 20% off their January peak and diesel prices 5% higher since the beginning of May?

It remains to be seen, but even as disruptive as the past three years have been, for various reasons, some good, others bad, Memorial Day traditionally kicks off rate increases that can last into July. The next two weeks will be important in seeing where the market is headed. 

While spot rates have found some solid footing, contract rates have come under pressure. The initially reported contract rate, which is reported on a two-week lag, dipped 4 cents per mile over the past week to $2.91/mi, just below the NTI. Contract rates are just the base linehaul rate so the comparison with NTI is a little difficult since NTI is an “all-in” rate, but NTIL is a cleaner comparison.

NTIL currently sits at $2.07/mi, up 5 cents per mile from last week, similar to the overarching NTI. Contract rates were a 28% premium to the base linehaul spot rate on May 5, which is the latest available data point for contract rates. NTIL crossed over contract rates in mid-February, but since then there hasn’t been much downward pressure on contract rates. Traditionally spot rates have to be significantly below contract rates for 30 to 90 days before shippers shift to the spot market to take advantage of lower rates. If that holds true in the current environment, expect the downward pressure on contract rates to start showing up in the data quite soon.

FreightWaves’ TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, continued to slide this week. Over the past week, the FreightWaves TRAC spot rate declined by 4 cents per mile to $2.60, following a 4-cent per mile decline last week. The TRAC rate is 36% off of its peak as rejection rates have fallen well below 3%, among the lowest rejection rates in the country.

On the East Coast, rates reacted a little more like the NTI than those on the West Coast. The FreightWaves TRAC rate from Atlanta to Philadelphia increased 6 cents per mile to $3.30, the first meaningful increase since the middle of February. Heading into the Northeast is becoming increasingly expensive as diesel prices soar and diesel inventory levels are at historically low levels, leading to carriers trying to avoid the markets (or charging more).

As capacity changes over the next two weeks due to the holiday, expect that volatility in rates will continue into early June as the summer season approaches.

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].