Sonar Analyst Reports

‘Race to the bottom’ in truckload contract rates sets in

Higher volumes aren’t going to lead us out of this rate environment

Pressure is being let out of global freight markets as demand falls and lower volumes in a variety of modes are more easily handled by the capacity and infrastructure built up during the last two years of the COVID-19 pandemic.

Transportation rates in several modes, including truckload and ocean container, are falling as demand deteriorates and capacity loosens.

The softness started with American consumer demand, which has been wobbling and running out of momentum as the effects from fiscal stimulus faded and inflation took hold in the economy. Two quarters of negative GDP growth — coupled with very high import levels — depressed the demand for transportation capacity and caused trucking spot rates to plummet.

(Chart: FreightWaves SONAR. The National Truckload Index – Daily, Linehaul shows an average of trucking rates in USD per mile exclusive of fuel and other surcharges. To learn more about FreightWaves SONAR, click here)

During what should have been the traditional summer bull run, linehaul rates stabilized momentarily but are now grinding back downward, even as diesel prices climb again. 

FreightWaves’ Outbound Tender Rejection Index, which measures the percentage of truckload shipments rejected by carriers, fell Tuesday to a new cycle low of 5.43%. (Wednesday’s number of 5.44% isn’t meaningfully better.) Two consecutive quarters of negative GDP growth and high inflation, coupled with the entry of huge numbers of small carriers in the market, have shifted the supply-demand balance in domestic trucking. 

When carriers feel that they have few attractive options in the freight market, they take the loads they can get, rejecting fewer shipments and accepting more from their contracted customers. Low tender rejections indicate a lack of carrier pricing power; low rejections will also push spot rates lower until they become so attractive to shippers that contract rates too come down.

Today, the largest five trucking markets — Los Angeles, Dallas, Atlanta, Chicago and Harrisburg, Pennsylvania — all show very loose trucking capacity. Only Harrisburg (OTRI.MDT) is rejecting a significant amount of outbound freight at 8.36%. 

(Chart: FreightWaves SONAR. Outbound tender rejections in LA, Dallas, Atlanta, Chicago and Harrisburg. To learn more about FreightWaves SONAR, click here.)

Los Angeles is particularly soft, rejecting just 2.2% of outbound loads, and conditions there look to become even leaner for truckload carriers. When consumer buying pressure eases domestically, shippers replenish their inventories less urgently, and traffic from distribution centers to retail locations slows. Eventually purchase orders to upstream suppliers are adjusted downward, and months later imports start to slow.

U.S. third-party logistics providers are concerned about volume risk and seem willing to sacrifice rates to secure volume. 

An executive at a publicly traded U.S. transportation provider told FreightWaves Wednesday morning that his team had engaged in multiple rate-reduction exercises with single customers and that about half of his firm’s top 25 customers had asked for rate reductions. After cutting revenue per load by 20% from its peak in February, the provider has managed to eke out 10% year-over-year volume growth, but the situation “feels like a typical race to the bottom.”

An analyst at a top 10 freight brokerage told FreightWaves: “Our view is that the high-volume, ‘live pick, live drop’ contract freight is going to see contract rates down into next year.

“I expect national average rates to fall until the gap between spot and contract closes,” the analyst added.

FreightWaves analyst Henry Byers called for a dramatic drop in U.S. imports based on ocean container bookings data that we saw in June: That drop is now materializing in a major way.

According to the Port of Los Angeles’ Signal Port Optimizer, the TEU volumes arriving this week are down 12.44% from last week, and next week will experience a further 10% drop from this week’s volume. Next week, the United States’ largest port expects volumes to fall 25% year over year.

The ocean container bookings data in Container Atlas confirms that inbound ocean container volumes to the United States will continue to deteriorate for months to come. The chart below displays booking levels from all ports globally to the U.S., with the shipment tied to the date it was booked with the carrier. Depending on the port of origin, those volumes will hit American shores in 30-70 days.

(Chart: FreightWaves Container Atlas. Ocean Booking Volume Index, all ports to U.S. To learn more about FreightWaves SONAR, click here.)

The drop in inbound ocean containers is a long-delayed knock-on effect taking place months after the U.S. truckload market rolled over. It takes that long for purchase orders to be adjusted, suppliers to reduce shipment sizes and those reductions to be felt at U.S. ports. But now that it’s here, Los Angeles, considered the “beating heart” of the U.S. truckload market, will likely see negative year-over-year inbound container volumes for the remainder of 2022.

The capacity picture is still fuzzy: There is data showing high numbers of carrier failures, as well as anecdotal reports from insurance providers experiencing record months in terms of new policies issued. What seems to be clear is that small carriers that entered the market during peak asset prices — prices for 3-year-old trucks peaked at $143,000 in April — are experiencing financial distress, while more carriers continue to enter the market, potentially with somewhat lower fixed costs.

For those reasons, it’s unwise to assume that the bottom for the U.S. truckload market is already in. Be prepared for further downward pressure on rates, especially if you’re a transportation provider with a mandate for volume growth.

2 Comments

  1. These types of dramatic market fluctuations are the “exact” reasons why shippers and carriers need a better and smarter way to address the marketplace for the long term. Driving rates down to the point where you lose an impactful amount of truck capacity, only leads to fewer trucks, which yet again causes higher rates. Furthermore, every shipper needs to re-evaluate their approach to contract rates with larger carriers. Too many of the larger carriers left their customers hanging with unprecedented rejection rates for a very long time. It has been, and will always be the smaller and independent carriers who will pull shippers out of rejection hell. Yet they are the first ones to be cut out by shippers. And let’s be honest here, when shippers say they don’t like dealing with the smaller carriers, who the heck do they think is moving their freight? The larger carriers, alongside of the brokerages, are tendering that freight to the smaller carriers. So why cut them out? A MUCH better option is just a few weeks away, and the industry is about to learn a very hard lesson.

    1. great point, last I checked over 60% of the freight is hauled by small carriers. These market fluctuations are driven by Keynesian economics ideologies ( that brokers loved until the driver shortage became real), along with natural laws of supply and demand, and the FMCSA regulations. One biggest FMCSA regulation is requiring carrier to maintain insurance year round, if small & 1 truck carries could “idle” their authority, they could be more flexible meeting demand upswings, and quit when bottom drops out. Now the FMCSA has all kind of arguments against doing that , mostly valid 30 years ago, but with modern day instantaneous coumations, and trucks being tracked everywhere they go now, no reason why this should be looked into, of course this would ruin the gravy train for some. Another thing they could is regulate brokers and enforce the laws on broker that are on books. Brokers require at least 3 more truck to do what a carrier can do for a shipper, more brokers more trucks on the road, and that means wild rate swings, but the shipper never see the down side of the rate, all goes in the intermediaries pockets.

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.