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In the last week of Q2, freight demand rises only slightly

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:

Van volumes drive growth in the overall OTVI

According to seasonal trends, this week is the last in which one would see elevated activity from shippers. Van volumes especially tend to be weaker throughout July, only rallying once the back-to-school season starts in mid-to-late August. This year, however, the second quarter ended not with a bang but a whimper. The Outbound Tender Volume Index (OTVI) saw only middling growth this week, while true freight flow remains below year-ago levels.

Tender volumes rise slightly:
SONAR: OTVI.USA: 2022 (blue), 2021 (green) and 2020 (orange)
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OTVI rose a slim 0.6% on a week-over-week (w/w) basis as retailers contend with overstocked shelves and reduced discretionary spending from consumers. On a year-over-year (y/y) basis, OTVI is down 20.46%, although y/y comparisons can be colored by significant shifts 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).

Accepted volumes are unimpressive:
SONAR: CLAV.USA: 2022 (blue), 2021 (green) and 2020 (orange)
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Contract Load Accepted Volumes (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 barely any w/w growth (0.13%) but also a dip of 2.1% y/y. This y/y difference confirms that actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI to lower levels.

Despite the worrisome situation facing the full-truckload market, container ports are still supplying large quantities of freight for truckers to move inland. Metonymically known as Barbours Cut, the Port of Houston just posted a record month of volume in May, moving a total of 335,000 twenty-foot equivalent units (TEUs). While part of that growth has been driven by oil and petroleum exports from the nearby Gulf Coast Basin and West Texas’ Permian Basin, the port has also seen a spike in imports of raw construction materials such as plywood and steel.

Even though ocean carriers are bracing for spot rates to decline y/y in the back half of 2022, carriers are still on a shopping spree for newbuild container ships. The amount of new capacity currently on order totals more than 7 million TEUs. There are still some concerns about the near-term future of containerized imports, not least of which are those surrounding negotiations between the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). The current contract between the two parties is set to expire July 1. Previous negotiation cycles have led to slowdowns at the ports, but the ILWU and PMA have jointly stated that “neither party is preparing for a strike or lockout [this year].”

Volumes rise across the board by small degrees:
SONAR: Outbound Tender Volume Index – Weekly Change (OTVIW).
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click here.

Of the 135 total markets, 75 reported weekly increases, albeit with many of these w/w raises occurring in smaller markets.

Atlanta, the nation’s largest freight market by outbound volume, saw volumes grow by an impressive 6.83% w/w. This recent swell in volume is coupled with an expected one-two combo of higher rejection rates and spot rates in the market. Atlanta, which is responsible for 4.11% of the nation’s volume, is a major manufacturing hub in the region, signaling the market is benefiting from sustained industrial demand.

Ontario, California, the second-largest outbound market that mostly comprises imports from the nearby Ports of Los Angeles and Long Beach, is not doing well. Freight demand in Ontario fell by a concerning 5.34%. Given the recent activity surrounding AB5 (discussed below), this latest dip could indicate the first nail has been driven into the market’s coffin. The aforementioned negotiations between the ILWU and PMA will only further complicate regional matters.

By mode: Reefer volumes saw a slight dip this week but not one that was large enough to drag the overall OTVI into the red. The Reefer Outbound Tender Volume Index (ROTVI) is down a slim 0.89% w/w. On a yearly basis, however, accepted reefer volumes are finally up by equal measure. Van volumes are performing more strongly, as the Van Outbound Tender Volume Index (VOTVI) is up 1.75% w/w.

Rejection rates poke head above 8% in run-up to Independence Day

After breaking the monthslong trend of staying just above 8% — and then falling even further — OTRI finally saw a brief rally late this week. This latest rise in tender rejections is likely due to some capacity going offline before the three-day Fourth of July weekend. Given the current dearth of freight in the spot market, it is unlikely carriers will take an extended vacation this upcoming week, as they did during the previous year.

OTRI recovers, rising above 8%:
SONAR: OTRI.USA: 2022 (blue), 2021 (green) and 2020 (orange)
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Over the past week, OTRI, which measures relative capacity in the market, rose to 8.18%, a change of 43 basis points (bps) from the previous week. OTRI is now 1,708 bps below year-ago levels.

After a hard-fought battle in the courts, California’s controversial AB5 law is now set to be enacted as the Supreme Court denied review of an appeal on Thursday. The law, which could seriously disrupt trucking capacity and rates in the state, would apply to all carriers that move loads in California, regardless of whether they are based in the state or not. Given the Ports of Los Angeles and Long Beach are responsible for a plurality of America’s import volume, AB5 is likely to have ripple effects throughout the nationwide industry.

The law threatens to recategorize certain owner-operators — a substantial portion of truck drivers — from independent contractors to full-time employees. As full-time employees, these owner-operators would be entitled to salaries and other benefits, the cost of which would likely be passed onto shippers and brokers. At present, there is no clear timeline for the law to take effect, but it is eligible for immediate enforcement.

Capacity tightens in a few different regions:
SONAR: WRI (color)
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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, a couple of regions this week posted blue markets, which are the ones to focus on.

Of the 135 markets, 75 reported higher rejection rates over the past week as some capacity goes offline in advance of the upcoming holiday.

Given that Atlanta was one of the major winners in freight demand this week, it should come as no surprise it was also a deep blue market for tender rejections, with its local OTRI up 425 bps. The Port of Houston, which posted a record month of containerized volume in May, appears to be struggling against a mismatch between freight demand and regional capacity, as Houston’s local OTRI is up 112 bps this week.

But even though tender volume took a hit in Ontario this week, rejection rates are still up 88 bps in the market. This rise could signal an early reaction to the looming AB5 law as carriers divest from the region. The “gold rush” mentality that surrounded the market in the fourth quarter of 2021 and early in 2022’s first quarter might also contribute to a carrier exodus. After capacity flooded the region, middling freight demand could not sustain all the newcomers.

SONAR: VOTRI.USA (blue); ROTRI.USA (green); FOTRI.USA (orange)
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By mode: This week’s uptick in the overall OTRI has been mostly driven by reefer rejection rates. The Reefer Outbound Tender Reject Index (ROTRI) is up 87 bps w/w, despite being down a drastic 2,930 bps y/y. Meanwhile, the Van Outbound Tender Reject Index (VOTRI) is currently up 43 bps w/w but remains a staggering 1,814 bps below year-ago levels.

Flatbed rejection rates, which had been the sole rising tide during much of Q2, have since dropped off, with the Flatbed Outbound Tender Reject Index (FOTRI) falling 196 bps w/w to 23.31%. These past two weeks of decline in FOTRI reflect the cooling housing market, as housing starts have slowed, but might also signal industrial demand is ailing.

Linehaul spot rates bounce back slightly as contract rates remain unmoved

In line with the uptick in tender rejections this week, spot rates have risen by a slight degree. It is unclear whether the National Truckload Index (NTI) has rallied enough momentum to weather the slow period before peak season, which typically begins in mid-August. Given that the NTI is inclusive of fuel, however, it could also rise due to continued hikes in diesel prices, such as those predicted by the Energy Information Administration.

Spot rates inch upwards:
SONAR: National Truckload Index, 7-day average (blue; right axis) and dry van contract rate (green; left axis).
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Over the past week, the NTI has risen 3 cents per mile to $2.87/mi. In the previous year, spot rates climbed steadily over the summer until plateauing in September. Whether spot rates are currently rising along that trend is doubtful, given their dismal performances in the past few months.

The NTIL, which is the linehaul rate that removes fuel from the all-in NTI, also rose 3 cents to $1.98 per mile, indicating nearly a third of spot rates are going straight to fuel payments. For now, the rising NTI is carried by higher linehaul rates and not diesel prices.

Contract rates, which are base linehaul rates like the NTIL, remained static this week at $2.93 per mile. Given the second quarter of 2022 is nearing its end, we can expect to see renegotiations in the weeks to come. These renegotiations, should they take place, will heavily favor shippers and, as a result, contract rates should continue to come down from their current highs.

To learn more about FreightWaves SONAR, click here.

The chart above shows the spread between the NTIL and dry van contract rates, showing the index has continued to fall to new all-time lows in the data set, which dates back to early 2019. Throughout 2019, contract rates exceeded spot rates, which led to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to new 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.

The spread quickly fell to minus 95 cents, where it stands today. This wide spread will place downward pressure on contract rates as the calendar turns to the back half. 

SONAR: FreightWaves TRAC rate from Los Angeles to Dallas.
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The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, saw some favorable gains. Over the past week, it rose by 5 cents to $2.67/mi. Compared to the NTID, or the National Truckload Index – Daily, rates from Los Angeles to Dallas are depressed compared to the national average as expected, but that was not the case at the start of the year. When carriers flooded Southern California in January, they pushed down spot rates rapidly.

SONAR: FreightWaves TRAC rate from Atlanta to Philadelphia.
To learn more about FreightWaves TRAC, click here.

On the East Coast, especially out of Atlanta, rates are falling but are still beating the daily NTI. The FreightWaves TRAC rate from Atlanta to Philadelphia plummeted 11 centsper mile to $3.40, compounding last week’s decline of 9 cents per mile. Now that diesel prices have stabilized in the Northeast and Philadelphia is posting higher volume, carriers are less reluctant to head north out of the busy Atlanta market.

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].

Michael Rudolph

Michael Rudolph is a research analyst at FreightWaves and is a former freight broker. Prior to entering the logistics industry, Michael worked in academia. He holds an MA from the University of Chicago.