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 take an expected hit this week
As longtime readers of this column know, freight demand suffers during the week of a federal holiday. This lull happens since the Outbound Tender Volume Index (OTVI) is calculated as a seven-day moving average. The holiday is thus included as a “null day,” bringing the average down for the week of its inclusion. Still, we can note that shippers were in no great hurry to move any last-minute freight before Labor Day.
Right before any holiday, OTVI usually ticks up as shippers scramble to get freight out the door. Last week, we did not see any such scramble. So while OTVI fell 15.25% on a week-over-week (w/w) basis, this fall is less severe than it otherwise might have been. On a year-over-year (y/y) basis, OTVI is down 23.66%, 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 an expected fall of 15.1% w/w but also a dip of 6.6% y/y. Since Labor Day was also a factor behind lower volumes last year, this y/y comparison is fair and shows that actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI to lower levels.
The most recent print of the Logistics Managers’ Index took pains to underscore the congestion emanating from the ports. Despite labor negotiations on the West Coast between the stevedores union and the container ports continuing, any feared strikes or slowdowns have yet to appear. Thus, the major driver behind port congestion is shippers moving from the developed infrastructure of Southern California to the less developed ports on the East and Gulf coasts. Depending on how closely shippers follow the warnings of this column, I share some blame here: If negotiations were not wrapped up quickly, I braced for union activity that would force the issue.
In Los Angeles and Long Beach, the ports are inundated with empty containers that either need to be shipped back to Asia or else farther inland along the rails. On the East Coast, port congestion is leading to containers stuck on much-needed chassis. To skirt the warehousing capacity crisis, shippers are increasingly relying on drop trailers to store nonperishable goods, sometimes even in their own parking lots.
It should come as no surprise then that the headline index (LMI) fell one point from last month, reading 59.7 for August. While any reading above 50 indicates expansion, this latest drop is the first reading below 60 since May 2020 and marks the third consecutive reading under the all-time LMI average of 65.3. Meanwhile, the Transportation Capacity index fell 4.8 points from last month to 64.3, as the Transportation Prices index fell 1.5 points to 48.0, indicating contraction at a faster rate. These indexes largely agree with FreightWaves’ own data. When the Transportation Capacity index falls below 50, it will indicate that capacity is eroding from the collapse in spot rates.
Of the 135 total markets, 11 reported weekly increases in tender volume as freight demand is depressed by Monday’s holiday.
Detroit is one of the few major markets that saw tender volumes grow this week. Freight demand in Detroit grew 8.32% w/w, boosted by still-robust industrial output. Although job growth among vehicle manufacturers shrank by 1,900 in August, the broader manufacturing sector saw payrolls rise by 22,000 in the month.
By mode: As with the broader market, there is not much to report on dry van and reefer volumes this week. While the Van Outbound Volume Tender Index (VOTVI) is down 16.17% w/w, this dip is completely unsurprising. Strangely enough, however, the Reefer Outbound Volume Tender Index (ROTVI) is only down 9.36% w/w. After seeing an extreme drop on Monday, reefer volumes quickly recovered more than half of their holiday losses.
Rejection rates quickly lose their holiday bump
Following a cycle low of 5.43% last week, OTRI did see a bump as capacity went offline during the holiday. But after reaching 5.73% on Sunday, OTRI resumed its previous decline. Absent any increase in tender volume or spot rates, there is little reason for OTRI to trend upward in the near future.
Over the past week, OTRI, which measures relative capacity in the market, fell to 5.44%, a change of 20 basis points (bps) from the week prior. OTRI is now 1,719 bps below year-ago levels.
During the record earnings of late 2020 and 2021, large carriers quickly amassed a war chest. At the time, there was so much freight demand — especially for bulky (and therefore profitable) durable goods — that carriers were mostly struggling to meet demand with their supply. To make matters worse, the semiconductor crisis limited the availability of new equipment entering the market, while some large carriers suffered from a so-called “driver shortage.”
That semiconductor crisis has not lessened, meaning that carriers large and small are struggling to maintain their aging equipment. With increased maintenance, of course, comes increased maintenance costs. Thus, possessing a war chest but not being able to purchase equipment directly from manufacturers, a wave of mergers and acquisitions has flooded the industry. These M&As ensure that carriers looking to grow can instead assume their acquisitions’ equipment, drivers and infrastructure (e.g., terminals).
To be sure, this rash of M&A activity is largely confined to larger carriers, meaning that small carriers will continue to skirt the razor’s edge with shrinking margins. As intimated above, it is probable that we will see a mass exodus of drivers from the industry as lowering contract rates remove the last bastion of profit for carriers.
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, no regions this week posted blue markets, which are usually the ones to focus on.
Of the 135 markets, 68 reported higher rejection rates over the past week, though 35 of those reported increases of only 100 or fewer bps.
Rejection rates have plummeted in the Grand Rapids, Michigan, market. To be sure, Grand Rapids’ local OTRI is still at 11.22%, placing it among markets with the highest tender rejection rates. But those rates did fall a staggering 482 bps w/w, leaving an open question as to whether they will recover next week or if they are racing to meet an eventual floor.
By mode: Dry van rejection rates proved to be something of an exception this week. Instead of rising over the three-day weekend, the Van Outbound Tender Reject Index (VOTRI) dipped on Monday and fell further in the week, tumbling 15 bps w/w.
Reefer and flatbed rejection rates followed historical trends, however. The Flatbed Outbound Tender Reject Index (FOTRI) jumped to 19.1% on Monday — its highest level since late July. But FOTRI has started to slide, falling 184 bps w/w to 16.46%. The Reefer Outbound Tender Reject Index (ROTRI) has similarly been subject to extremes: After reaching a two-month high of 7.87%, ROTRI plunged 95 bps w/w and returned to 6.55%.
Holiday prices drive slight growth in rates
Last week, diesel prices broke a nine-week period of consecutive declines, with the national average price edging up to $5.115 per gallon. This week, diesel prices once again fell, mostly responding to larger-than-expected inventory builds. The national average diesel price is now $5.084 per gallon. This easing of diesel prices should supply some downward pressure on spot rates, provided that diesel continues to fall.
This week, the National Truckload Index (NTI) rose 3 cents per mile to $2.70. Spot rates almost unfailingly rise in the week of a federal holiday, so this latest gain is little surprise. As with large carriers, the oil and gas industry is seeing its fair share of M&A. These are driven by expectations that U.S. oil production will grow, broadly jettisoning fears of an industry recession in favor of fears of equipment shortages. If this optimism proves to be justified, shippers will benefit from falling fuel prices.
The linehaul variant of the NTI (NTIL) was the primary driver of elevated spot rates. The NTIL, which excludes fuel costs and other accessorials, likewise rose 3 cents per mile to $1.92.
Contract rates, which are base linehaul rates like the NTIL, saw little action this week. Although they rose to $2.79 per mile earlier in the week, contract rates proved unable to hold onto those gains for the remainder of the week. All in all, contract rates did not budge the needle this week, remaining flat at $2.76 per mile.
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 89 cents per mile.
The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, seems to have met its floor. Over the past week, the TRAC rate grew 2 cents per mile to reach $2.64 per mile. The daily NTI (NTID), which is at $2.74 per mile, is once again outpacing rates from Los Angeles to Dallas.
On the East Coast, especially out of Atlanta, rates did suffer a decline but are still beating the NTID. The FreightWaves TRAC rate from Atlanta to Philadelphia fell 2 cents per mile this week to settle at $2.82. Rates along this lane have been falling since mid-July, when the TRAC rate was $3.48 per mile. Low inventory of diesel fuel in the Northeast could soon drive outsized prices, which in turn would place upward pressure on rates to the region.