This week’s DHL Supply Chain Pricing Power Index: 75 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 70 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (Carriers)
The DHL 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:
Load volumes: Absolute level positive for carriers, momentum neutral
The Outbound Tender Volume Index (OTVI) maintains strength, less than 3% off the all-time high set on June 7. Absolute tender volume levels, measured as shippers’ request for capacity, have recovered most of the July pullback, which is a traditionally soft period for freight. Over the past week, volumes increased by 2.5%, to 15,716, the largest single-week increase, outside of erasing holiday related noise, since May 30.
The rise in volumes continues to outpace the rise in rejection rates, signaling that overall accepted freight volumes are continuing to set new highs. While volume levels have been range-bound for the better part of six months, trends within the underlying index are worth mentioning.
Both long- (800-plus miles) and short-haul (100-250 miles) tender levels propped up the overall index as both increased by more than absolute OTVI. Short-haul volumes, which were called out in last week’s Chart of the Week and Pricing Power Index, were up another 4.4% w/w while long-haul volumes increased by 2.6%.
Fourteen of the largest 20 freight markets in the country had a strong week as volume growth outperformed the overall index. The Southern California markets, Ontario and Los Angeles, the largest and fourth-largest freight markets in the country, posted strong increases over the past week, as tender volumes increased 2.2% w/w and 7.7% w/w, respectively. The increases in volumes outpaced rejection rates as more freight flows through the ports of Los Angeles and Long Beach.
As congestion mounts in San Pedro Bay, beneficiaries will be the major East Coast ports: New York/New Jersey, Savannah, Georgia, and Houston, as well as auxiliary West Coast ports like Oakland, California, which has been dealing with congestion itself for much of the year.
Ports like Savannah and New York/New Jersey are passing a record number of imports through the ports at the moment. The proximity of these ports to large consumption centers compared to the West Coast ports allows for a significant increase in shorter length-of-haul volumes, keeping upward pressure on rates, especially longer lengths of haul out of markets like Elizabeth, New Jersey, Philadelphia and Baltimore.
Look for freight volumes in these markets, as well as surrounding markets, to have some upward movement across all lengths of haul as freight is moved inbound toward warehousing districts, like the outskirts of Atlanta and Harrisburg, Pennsylvania, as well as longer-haul moves.
While import volumes are strong, the intermodal value proposition has broken down on both eastbound lanes out of Southern California as well as westbound out of Atlanta. As the railroads are protecting contracted capacity, they have essentially priced themselves out of any excess freight along lanes like Atlanta to Dallas and Los Angeles to Dallas. This will cause a shift to the highway along these lanes, which will likely keep freight volumes elevated for a prolonged period.
Coupled with the expectation of a stronger-than-normal peak holiday season, the outlook for freight volumes remains strong through the rest of the year. Given the congestion around the ports, expect that goods will be moved closer to the consumption centers as shippers prepare for peak season.
Tender rejections: Positive momentum for shippers takes a breather as carriers maintain power
After hitting the lowest level in more than a year, the Outbound Tender Reject Index (OTRI) reversed course over the past week, increasing by 23 basis points (bps) to 21.11%. The positive momentum that shippers gained in July has been halted nearly halfway through August. The back half of August is typically when rejections start to climb higher ahead of peak holiday season.
The rise in volumes with shorter lengths of haul is now playing an important role in the capacity side of the market. Over the past week, short-haul rejection rates have increased faster than any other length of haul, rising by 63 bps w/w.
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Long haul (LOTRI) — loads moving over 800 miles.
Tweener (TOTRI) — loads moving 450 to 800 miles.
Midhaul (MOTRI) — loads moving 250 to 450 miles.
Combined, Los Angeles and Ontario, California, often deemed the heartbeat of the U.S. freight market, represent over 7% of total requests for capacity in the country and are among the tightest markets nationwide, even though rejection rates are well off the late April highs.
In the past week, rejection rates in both Los Angeles and Ontario have been increasing steadily, up 130 bps, compared to the national rejection rate, which has increased just 23 bps. The intermodal value add typically felt on long-haul moves has broken down in recent weeks as loaded intermodal volumes out of Los Angeles are at the lowest level since early March, leading to increased pressure on truckload capacity as requests for capacity in Southern California are on the rise.
The East Coast port markets, Savannah and Elizabeth, are tightening at a rapid pace as import volumes surge. Import volumes in both markets set all-time highs within the past week, placing strains on the truckload markets in both. The increase in import activity at the ports is starving capacity for the longer lengths of haul out of the two markets as shorter length-of-haul rejection rates have fallen significantly over the past week, while the tweener and long-haul rejection rates have increased.
By mode: Relative capacity changes in the three equipment types have been similar since June, though a recent uptick in reefer activity has caused a divergence in rejection rates. As reefer shippers are experiencing slightly better compliance from contracted carriers, securing reefer capacity is still plaguing the market overall. Relative capacity in the reefer market is still much tighter than last year as rejection rates are up over 600 bps. Look for relative reefer rejection rates to remain stubbornly high throughout a traditional period of tightening as reefer activity ramps up in the large poultry-producing states, like Arkansas, in the back half of August through October.
Rejection rates in the dry van market, which accounts for a majority of the overall rejection index, seemed to have found some footing over the past week. Dry van rejection rates have been volatile over the past six months, though compared to reefer rejection rates, that volatility looks muted. As we head into what will probably be an earlier-than-expected peak season, strains on capacity are likely to continue into 2022 even as elevated rates take hold.
The industrial economic recovery, notably in housing, has really strained flatbed capacity across the country. The flatbed market had lagged behind both reefer and dry van markets given they are skewed toward the consumer, which recovered faster than the industrial economy. The volatility in the flatbed market has largely been erased over the past month, though securing flatbed capacity remains extremely strenuous and will for the foreseeable future.
Even as capacity has been added to the truckload market since the beginning of the year, the rate at which volume is flowing through networks is keeping capacity unbearably tight amid an elevated rate environment. With an infrastructure bill now through the Senate and headed to the House of Representatives, the impacts on truckload capacity are likely to persist longer than anticipated.
Freight rates: Absolute level and momentum positive for carriers
For the second consecutive week, the Truckstop.com national spot rate averages notched all-time highs. The dry van seven-day moving average reached $3.35 a mile, inclusive of fuel, in the week ending Aug. 8. The national reefer average rose 7 cents to $3.99 a mile, inclusive of fuel. Of the 100 spot market lane pairings available in SONAR, just over half (52) were positive week-over-week.
Tender rejection rates have been volatile even in major freight hubs since the beginning of August. But volumes in the five biggest markets have consistently outpaced the national average. Carriers have worked to stabilize networks and renegotiate contracts over the past several months, and there has been a noticeable change in carrier compliance. Yet volumes continue to gush from major markets, sucking up surrounding capacity. The downward pressure on rejection rates hasn’t translated into lower spot rates to this point. And with peak season just weeks away, there doesn’t seem to be any lull in the cards between now and then.
After surging ~15% from late April to early June, FreightWaves contract dry van rates have been sideways ever since, fluctuating between $2.50 and $2.60 a mile, excluding fuel surcharges.
With OTRI still above 20% nationally, and still a large spread between contract and spot, there’s more room for carriers (and brokers) to continue bidding up contract rates.