Carriers’ pricing leverage suffers a harsh blow

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

Volumes fall closer to 2019 levels

As longtime FreightWaves readers will know, 2019 marked the truckload industry’s last recession. Back then, the market was struck by the fatal pincer movement of oversupply from carriers and a lack of demand from shippers. Yet the broader economic picture was not especially grim in 2019, though freight markets did suffer from consumer spending habits shifting more toward services (which are relatively insignificant drivers of volume) and away from goods.

Needless to say, comparisons drawn between 2019 and the present day are neither flattering nor inspiring of hope. But it is exactly those sorts of comparisons that current trends in the Outbound Tender Volume Index (OTVI), which measures national freight demand by shippers’ requests for capacity, suggest.

This week, OTVI fell 1.7% on a week-over-week (w/w) basis. On a year-over-year (y/y) basis, OTVI is down 26.41%, although y/y comparisons can be colored by significant movements 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 dip of 1.31% w/w but also a fall of 12.7% y/y. This y/y difference confirms that actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI lower.

One heavy counterweight against any potential surges in consumer demand, which includes demand for freight-intensive goods, is inflation. The September release of the Consumer Price Index (CPI), commonly referred to as “headline inflation,” came in above economists’ expectations. The CPI rose 0.4% over last month and is up 8.2% y/y, slightly hotter than the expected 8.1% y/y gain. 

The core CPI, which excludes goods with volatile pricing like gasoline and food, is now at its highest level since August 1982. The core CPI is up 0.6% over last month and is now 6.6% higher y/y. While I do caution against placing undue emphasis on the core CPI numbers, since consumers ultimately pay for discretionary items from the same wallet as they do gas and groceries, it would be naive to assume that rising prices are not detrimental to demand.

Of the 135 total markets, 53 reported weekly increases in tender volume as freight demand flags across the board.

Volumes are, however, heating up on both the West and Gulf coasts, though the latter is mainly home to smaller markets. The heavyweight market of Ontario, California, saw freight demand swell 4.57% w/w, with much of that boost coming from import volumes trickling from the nearby ports of Los Angeles and Long Beach. Other port markets on the West Coast had a boost, with the Seattle and San Francisco markets seeing respective rises of 3.77% and 7.2% w/w.

By mode: In line with greater trends, both dry van and reefer volumes were dismal this week yet managed to outperform the overall OTVI. The Van Outbound Tender Volume Index (VOTVI) was down 0.36% w/w, reflecting the deceleration in the goods economy. While VOTVI was down 25.24% y/y, this difference is largely attributable to rapidly declining tender rejections over that same period. Accepted van volumes are nevertheless down 11.75% y/y.

The Reefer Outbound Tender Volume Index (ROTVI) is down 4.37% w/w. The reefer market is currently between the harvest season, which is winding down, and the upcoming winter season, when shippers will begin to protect temperature-sensitive freight against the cold. In this interim, reefer volumes should continue to be in a lull. Although ROTVI is down 34.75% y/y, accepted reefer volumes are only down 0.78% y/y.

Rejection rates fall below 5%

On Wednesday, OTRI finally broke the 5% threshold, dipping to 4.93%. Except for the tumultuous early days of the pandemic, when OTRI hit a (virtually) absolute floor of 2.57%, this barrier has not been crossed since October 2019. With this latest surplus of capacity, carriers will continue to yield leverage to shippers in upcoming negotiation cycles for contract rates.

Over the past week, OTRI, which measures relative capacity in the market, fell to 4.82%, a change of 38 basis points (bps) from the week prior. OTRI is now 1,596 bps below year-ago levels.

Although current metrics for capacity are loose and therefore do not favor carriers, there is yet potential for a change in the first half of 2023. In a recent interview with FreightWaves’ own J.P. Hampstead, William Kerr, president at Edge Logistics, stated that contract shippers have been increasingly moving drop freight, in which a driver simply drops a full trailer at the receiving site. As opposed to live freight, in which the driver waits at a facility to be loaded and unloaded in real time, drop freight requires more prior planning and thus a higher degree of commitment to the contracted loads. But Kerr predicts that live freight will return to prominence near the end of Q1 2023, driving spot volumes (as well as rates) higher.

While shippers have begun to take advantage of lower contract rates, there is a clear possibility that they might — in an effort to offset distended transportation budgets from 2020 and 2021 — seek even deeper discounts in the depreciated spot market. Of course, should the herd of carriers that primarily play in the spot market begin to thin from rising operational costs, it is simple economics that a scarcity of capacity coupled with rising demand will drive spot rates up. And, as rates rise, carriers will play harder to get as they carefully consider and wait for the most lucrative freight.

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, 40 reported higher rejection rates over the past week, though 22 of those reported increases of only 100 or fewer bps.

Although volumes are stagnating in the powerhouse market of Dallas, rejection rates did rise 109 bps w/w there. Last week, Dallas’ local OTRI fell to a cycle low of 3.56% — a far cry from the 20% seen a year ago. In the weakened state of the current market, it is increasingly common to see capacity loosen among the major outbound markets. When carriers flock to what were volume-heavy regions as spot volumes deteriorate, capacity is bound to become more available.

By mode: Flatbed rejection rates have not been this low since January 2021, despite reasonably healthy activity in the industrial sector. The Flatbed Outbound Tender Reject Index (FOTRI) fell 210 bps w/w to 12.72%. One of the biggest open questions that could decide whether FOTRI will dip below 10% is the future of oil prices. On the one hand, production cuts from OPEC+ will be a thumb on the scale for both global and domestic oil prices. On the other, inflationary pressures are stoking fears among commodity traders, tamping oil prices down. If Wall Street can be persuaded to invest further in domestic oil production, flatbeds will certainly be in demand.

Dry van and reefer rejection rates, however, remain on an unchanging decline. The Van Outbound Tender Reject Index (VOTRI) fell 40 bps w/w to a cycle low of 4.8%, while the Reefer Outbound Tender Reject Index (ROTRI) tumbled 53 bps w/w to 5.4%. In the absence of volume, there is little hope for a surge in tender rejections for either mode.

Spot rates lose last week’s gains

At the open of the third quarter, spot rates seemed primed to mount a comeback. One factor that kept spot rates elevated was disaster relief efforts in the Southeast after Hurricane Ian, efforts that have since tapered off in their intensity. While it is not uncommon for both spot and contract rates to get a boost at the beginning of a quarter, it is equally common for them to fall over the next few weeks.

Such was the case with the National Truckload Index (NTI), which fell 6 cents per mile w/w to $2.65. The NTI, which includes fuel surcharges and other accessorials, was not saved by rising diesel prices. The linehaul variant of the NTI (NTIL), which excludes these cost factors, performed even worse, losing 9 cents per mile to $1.87.

Contract rates, which are reported on a two-week delay, are presently involved in that start-of-quarter upswing. Contract rates, which are base linehaul rates that similarly exclude fuel surcharges and other accessorials, remained unchanged on a w/w basis at $2.72 per mile. While I have predicted that contract rate negotiations in Q4 will be shaped by shippers’ increased pricing power, I also expect a larger contraction at the start of 2023. More shippers will have their request-for-quote (or RFQ) cycles at the beginning of the year, though a significant portion of them have conducted RFQs on a quarterly basis since the pandemic introduced marked volatility into the market.

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. 

As the linehaul spot rate remains 80 cents below contract rates, there is still runway for contract rates to decline throughout the next six months.

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 5 cents per mile to reach $2.53. The daily NTI (NTID), which has fallen to $2.65, is still 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 4 cents per mile this week to settle at $2.76. Rates along this lane have been falling stepwise since mid-July, when the TRAC rate was $3.48 per mile.

For more information on the FreightWaves Passport, please contact Kevin Hill at khill@www.freightwaves.com, Tony Mulvey at tmulvey@www.freightwaves.com or Michael Rudolph at mrudolph@www.freightwaves.com.