This week’s DHL Supply Chain Pricing Power Index: 70 (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:
Positive volume momentum halted for the time being
The Outbound Tender Volume Index (OTVI), shippers’ requests for capacity, started the week with some positive momentum. However, that momentum halted in the back half of the week. OTVI is back below the 15,500 level, falling by 0.8% week-over-week (w/w).
Tender volumes had maintained strength against 2020 levels against extremely difficult comps over the past two and a half months. The recent slip in tender volumes caused OTVI to turn negative year-over-year (y/y), currently sitting 1.35% below 2020 levels. Outside of the Labor Day-affected week, this is the most negative the index has been this year.
While tender volumes are below 2020 levels, they are still extremely high. In comparison to 2019, current tender volume levels are up more than 60%. The strength in tender volumes for the better part of the past 18 months has been riding the heels of strong consumer spending and the replenishment of depleted inventories.
The inventory-to-sales ratio, while off the lowest level, is still well below pre-pandemic levels. The ratio, currently sitting at 1.1, shows just how thin inventory levels continue to be, especially when the ratio hovered around the 1.5 level before the pandemic.
The consumer continues to show strength, but there is some slowing growth in the retail sector, while services spending is continuing to pick up. Bank of America’s total card spending is running up 16% y/y and 18.5% over 2019 levels. Two of the outperformers are transit and restaurant and bar spending, which are running 40% and 30% higher y/y, respectively. Furniture and home improvement spending has finally started to slow, running up 9% and 5% y/y, respectively.
Ultimately, as traditional peak season approaches rapidly, expect that tender volumes will have a strong November and likely a strong December as well. As shippers try to rebuild inventory levels, tender volumes may maintain the strength into January, traditionally a softer period for freight. Adjusting OTVI, which includes both accepted and rejected tenders, by the tender rejection rates shows the true level of freight moving through networks. Accepted tender volumes are running down 1.3% w/w, maintaining strength compared to last year, running up 8.5% y/y. The wide gap in the year-over-year comparison is caused by the rapid increase in rejection rates at the beginning of November in 2020.
Across the country, volume levels in 55 of the 135 markets tracked by FreightWaves SONAR were higher over the past week. The largest freight markets in the country have recovered after a couple of slow weeks, especially in markets surrounding the largest ports in the country.
The two large Southern California markets, Ontario and Los Angeles, have been underperforming in recent weeks but finally broke the downward trend this week. Tender volumes in Ontario increased by 3.6% w/w. Even with the recent uptick in freight volumes in the market, volumes in Ontario are 5.3% lower than a year ago, thanks to difficult comps. In Los Angeles, tender volumes increased by 0.3% w/w but are now down over 17.5% y/y.
Freight volumes in the Northeast picked up over the past week as well. Elizabeth, New Jersey, which has been an outperformer in recent weeks, witnessed another uptick in tender volumes over the past week, jumping 14% w/w. Harrisburg, Pennsylvania, the third-largest market in the country, increased by 11.8% w/w.
Atlanta joined Dallas and Chicago with weekly declines in tender volume levels over the past week. Tender volumes in Atlanta fell by 2% w/w, while in Chicago tender volumes fell by 11.2% w/w. In Dallas, freight volumes fell by 0.6% over the past week but are still holding strong against the difficult comps, running up over 23% y/y.
By mode: It was another strong week in the temperature-controlled market as reefer volume growth has accelerated. Reefer volumes as measured by the Reefer Outbound Tender Volume Index (ROTVI) increased by 1.87% w/w. Even with this week’s increase, reefer volumes continue to run down by over 11.5% y/y, though winter weather and increased demand around the holiday season are going to drive reefer demand through the winter months.
Dry volumes did take a breather over the past week as the Van Outbound Tender Volume Index (VOTVI) decreased by 0.76% w/w. Much like the reefer market, van volumes are underperforming year-ago levels, down 2% y/y. If the holiday retail season is as strong as expected, anticipate dry van volumes picking up rather quickly in the coming weeks.
Rejection rates have yet to make a move higher like in 2019 and 2020
The Outbound Tender Reject Index (OTRI), a measure of relative capacity in the market, has increased over the past week, but after a brief stint above 20% is back sub-20%. Over the past week, rejection rates are up 11 basis points (bps) but are sliding to kick off November.
Rejection rates in October followed a seasonal pattern, albeit at an extremely high level. Rejection rates exited October lower than where they began the month, falling by 162 bps during the month. What is more interesting is that rejection rates haven’t started to pick up during November in any significant way.
In fact, the gap with 2020 levels is now the widest it has been. Rejection rates are now 735 bps lower than where they were in 2020. Even in 2019, rejection rates had started to pick up at the beginning of November and carried that momentum through the Thanksgiving holiday.
New capacity in the form of new Class 8 trucks isn’t likely to enter the market for a prolonged period as OEMs continue to be cautious, working through their own set of supply chain constraints. New Class 8 orders in October were down 12% from September levels and down 39% y/y. Backlogs are now stretching well into the back half of 2022 and putting constraints on the used truck market as well. A used 3-year-old truck now costs over $95,000, an increase of 67% y/y.
These capacity constraints aren’t likely to ease anytime soon, thus any improvements to carrier compliance are going to be driven by contract rates, which are already up 25% y/y.
The national rejection rate increased by 11 bps over the past week, as the majority of the country experienced rejection rate increases. Of the 135 markets within SONAR, 75 experienced rejection rate increases over the past week.
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. A blue market is any market that is tightening faster, highlighting increased prices as well as markets that should take priority. Conversely, red markets are loosening faster relative to the size of the market, where shippers are gaining some pricing power.
Over the past week, Ontario has tightened significantly as rejection rates have increased by 226 bps w/w. The rejection rate in the market is currently 17.01%, the highest it has been in three weeks. With the increase in rejection rates over the past week, expect that spot rates out of the region will pick up next week.
Atlanta and Memphis, Tennessee, are two markets that have loosened faster than other markets of like size. In Atlanta, rejection rates have fallen by 155 bps over the past week to 16.19%, the lowest they have been since June 2020. The deterioration in rejection rates in the market is a welcome sight for shippers who have been trying to drive improved carrier compliance through higher contract rates. Anytime a large freight market is loosening, shippers can claw back some pricing power.
In Memphis, rejection rates fell by 427 bps w/w. The market has seen an influx in activity thanks to BNSF opening an intermodal facility just across the Arkansas border in an attempt to alleviate congestion in Chicago and Dallas. Even with the decline over the past week, Memphis remains tighter than the overall market as the rejection rate currently sits at 27.5%, but is still 775 bps lower than year-ago levels.
By mode: Reefer rejection rates have started to accelerate heading into the winter months. Over the past week, reefer rejection rates increased by 130 bps, the largest weekly change in more than a month. Rates are still way off the high of over 50% experienced earlier in the year but are sitting 940 bps below year-ago levels. Expect that reefer capacity will remain tight over the upcoming months, as low temperatures across the country prop up reefer demand.
Dry van rejection rates were relatively unchanged this week. Over the past week, van rejection rates increased by 1 basis point to 19.19%. The largest equipment type in SONAR has been the most stable for the past year but VOTRI is now at the lowest level since late July 2020. The gradual decline in van rejection rates is consistent with the overall rejection index. Heading into peak season expect to see relative capacity tighten in upcoming weeks.
The flatbed market has finally taken a breather as rejection rates took a significant step lower over the past week. The Flatbed Outbound Tender Reject Index (FOTRI) fell by 571 bps over the past week, the largest single-week decline since early July 2020. The smallest equipment type in the dataset was the last to experience that run-up in rejection rates, which is why even with the large pullback this week, flatbed rejection rates are still 1,565 bps higher than 2020 levels.
Ultimately, capacity is going to be difficult to secure throughout the final two months of the year, even though rejections are well below 2020 levels. The risk of capacity flooding the market seems relatively small, especially in the short term. The barriers to entry have become increasingly difficult with the rapid rise in used equipment prices, so shippers expecting conditions to ease significantly over the next three months are in for a tough reality on the capacity front.
Spot rates break 3-week downward slide
The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week’s data.
Last week, while rejection rates were down just 24 bps w/w, the spot rate was unchanged, breaking a three-week losing streak. Truckstop.com’s national spot rate, which includes fuel surcharge and other accessorials, was flat w/w, currently sitting at $3.43 a mile. Spot rates are still 5% off the all-time high but will face upward pressure over the next two months.
Of the 102 lanes from Truckstop.com’s load board, 45 reported increases last week. Of the seven inbound Atlanta lanes, five reported increases over the past week, with the largest mover being Indianapolis to Atlanta, which rose 8 cents, to $3.57 a mile.
Even with the recent drawdown, the national spot rates continue to run over 20% higher y/y. Pressure will intensify for spot rates over the next couple of weeks as peak season kicks off.
Contract rates also pulled back over the past week, increasing by 1 cent per mile, to $2.70. Dry van contract rates, which are reported on a two-week lag, are just 7 cents per mile off the all-time high set in mid-September.
Contract rates, which are just the base linehaul rate excluding fuel surcharges and other accessorials that are included in spot rates, have closed the gap with spot rates significantly over the past year. Contract rates are outperforming spot rates, continuing to run over 22% higher than in 2020.
Ultimately, upward pressure on freight rates is likely to remain in place for at least the next six months and beyond as supply chain constraints continue to be worked through.
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