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 tumble unseasonably
Excluding holiday-affected weeks, freight demand has fallen to its lowest level since January 2021. Given that the first quarter is usually a soft season for tender volumes — although 2022 was a blazing exception — and that October is supposed to be one of the busiest months in the industry, this dismal comparison is a warning sign for an upcoming crash in the truckload market.
This week, the Outbound Tender Volume Index (OTVI) fell 4% on a week-over-week (w/w) basis. On a year-over-year (y/y) basis, OTVI is down 27.12%, 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 dip of 3.93% w/w but also a fall of 11.44% 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.
With the close of Q3 last week, we can gain some insight into what exactly is driving lower truckload volumes. To be sure, the market faces broad pressures from the global economy, which is arguably staring down its own recession. But there are also obstacles within the industry. Throughout Q3, import volumes at the Port of Los Angeles averaged negative growth of 27.13% y/y. Part of this decline is attributable to shippers rerouting their ocean freight to East Coast ports, like Savannah, Georgia. Yet import volumes for the U.S. fell, on average, 2.47% y/y during the quarter.
Unfortunately, there is little hope for relief in the near future. Ocean spot rates have plummeted, as reflected in the Freightos Baltic Daily Indices from China to the West and East coasts. Since the beginning of this year, these indices, which track average ocean spot prices per 40-foot container, have fallen 84% and 64% for the West and East coasts, respectively.
Of the 135 total markets, only 39 reported weekly increases in freight demand, showing the widespread deterioration of truckload markets.
The heavyweight markets of Ontario, California, and Atlanta suffered losses in tender volume of 13.1% w/w and 10.2% w/w, respectively. Other top markets, like Harrisburg, Pennsylvania, and Houston, were able to mitigate losses of freight demand, with their local OTVIs falling only 3.82% w/w and 1.24% w/w, respectively. The biggest winner, however, was arguably the cross-border market of Laredo, Texas, which saw volumes jump 127% w/w.
By mode: Reefer volumes were a bright spot this week, as the Reefer Outbound Tender Volume Index (ROTVI) rose 2.51% w/w. This growth was largely driven by seasonal trends in the Midwest and Central U.S. Van volumes, on the other hand, underperformed against the overall OTVI, as the Van Outbound Tender Volume Index (VOTVI) fell 4.95% w/w.
Rejections fail to budge the needle
After a slight bump to close out September, and the third quarter, the momentum was unable to sustain itself throughout the first week of October.
OTRI, a rejection rate-based measure of relative capacity in the market, declined by just 5 basis points over the past week, falling to 5.2%. The 5% mark has offered resistance; OTRI hasn’t fallen below that level since May 2020. But with tender volume levels on the decline, rejection rates could very well fall below 5% in the coming weeks.
While comps with the previous two years are quite difficult, tender rejection rates on a national level are more than 1,600 bps lower than they were a year ago.
The talk across the industry is “normalization,” but what does that actually mean?
The previous two and a half years have been impacted by the COVID-19 pandemic that caused rejection rates to be at their highest levels in history, above 20% from August 2020 through February 2022, while also dealing with record volume levels. The result was record-high spot rates that led to double-digit rate increases after the market showed signs that the surge in freight was here to stay.
Prior to the pandemic, the back half of 2017 and all of 2018 was the previous bull market for the freight market as the trade war between the U.S. and China intensified and freight volumes were pulled forward ahead of tariffs going into effect in 2019. At the same time, capacity was tight and rates were strong, but carriers were growing their fleets and drivers ventured out on their own.
Then 2019 happened.
2019 was a prolonged downcycle, lasting the entire year and rolling over into the first quarter of 2020 (prior to the pandemic). There were record numbers of carrier bankruptcies, and owner-operators were calling on Congress to put a floor on spot rates because market conditions were extremely soft.
So, over the past five years, market conditions have been abnormal. But the market, at the moment, resembles more of 2019 and early 2020 than it does any other period in the past five years. Rejection rates right now are 5 bps below 2019 levels, but rates remain well above 2019 levels, at least nominally.
While rates are still “elevated,” the costs to operate equipment are near all-time highs as well. Maintenance costs, insurance expense, labor costs and fuel costs have all increased right along with rates, and these elevated costs during a period when the freight market softens could spell trouble for carriers, especially moving into the first quarter of 2023.
Just because OTRI on a national level had very little change, that doesn’t mean there weren’t changes in rejection rates across the freight markets nationwide. Of the 135 freight markets in the country, 72 experienced rejection rate increases over the past week.
Arguably, one of the most important, if not the most important, freight markets in the country, Ontario, California, experienced a fairly significant uptick in tender rejection rates over the past week. Rejection rates in the large Southern California market increased by 179 bps over the past week to 3.76% — still low but at least heading in the right direction for carriers at the beginning of Q4.
On the opposite side of the country, Atlanta, the nation’s largest freight market, is experiencing rejection rate declines at a fairly rapid rate. Over the past week, the rejection rate in Atlanta declined by 79 bps to 3.82%. On the surface, that isn’t a huge decline, but in a market the size of Atlanta, it is significant.
By mode: Positive momentum brought on by the close of Q3 halted across all modes. The Flatbed Outbound Tender Reject Index (FOTRI) had been relatively stable around the 16% mark before falling 254 bps in the past week to 14.82%. While the flatbed market was the last equipment type to tighten and loosen, flatbed rejections are 1,311 bps below year-ago levels.
The Reefer Outbound Tender Reject Index (ROTRI) fell by 162 bps over the past week, dropping back below 6% and currently sitting at 5.93%. The reefer market had been an area that was gaining strength, at least in volume, over the past few months, but rejection rates continue to show the reefer market is quite loose. Compared to this time last year, reefer rejection rates are 3,263 bps lower.
The van market remains stable but loose, especially compared to the previous two years. The Van Outbound Tender Reject Index (VOTRI) increased this week, but by just 6 bps, up to 5.2%. Even while relatively stable, van rejection rates are 1,577 bps lower than they were this time last year.
Hurricane Ian and the close of Q3 lift spot rates into October
The end of the third quarter and the beginning of the final quarter of the year was one of the bright spots for spot rates over the past few months. Hurricane Ian relief efforts have aided in propping spot rates up, especially in the Southeast, while the freight market also dealt with the end of Q3.
Over the past two weeks, the FrieghtWaves National Truckload Index, which includes fuel, increased by 7 cents per mile to $2.71 a mile. The NTI is now at the highest level it has been since Aug. 13. The good news is that much of the increase stemmed from the actual linehaul rate, measured by the FreightWaves National Truckload Index – Linehaul Only (NTIL). Over the past two weeks, the NTIL increased by 8 cents per mile to $1.96 a mile.
Contract rates, which are base linehaul rates that exclude fuel costs and other accessorials, rose 2 cents per mile this week to $2.72. Since contract rates used to be renegotiated yearly, 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 quarterly. 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. Contract rates are set to decline in the fourth quarter as the market softens, but the next sizable drop will likely be felt in Q1 2023.
The chart above illustrates 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. 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 83 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, continued its decline despite capacity tightening in Southern California. Over the past week, the TRAC rate fell 3 cents per mile to reach $2.58.
On the East Coast, especially out of Atlanta, rates did see growth and are still beating the National Truckload Index – Daily Report (NTID). The FreightWaves TRAC rate from Atlanta to Philadelphia rose 2 cents per mile this week to settle at $2.72.
Looking at impacts from Hurricane Ian in the Southeast, the FreightWaves TRAC rate from Atlanta to Fort Myers, Florida, has increased by 38 cents per mile over the past two weeks, reaching $3.48 a mile. Upward pressure on lanes like this helped prop up the overall spot rate, even though the Atlanta to Fort Myers lane isn’t that dense.
Ultimately, if demand continues to decline and truckload capacity remains soft, rates will react negatively, especially outside the relief areas in the Southeast.