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: 65 (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) remains elevated, near all-time highs at 15,333. Total load tender volumes (shippers’ electronic requests for capacity) have not changed much since March — falling only 1.8% — but their rate of rejection has fallen from 28% to 21% in the same time period. In other words, more loads are being accepted at previously agreed upon rates while demand remains flat.
On a national level, OTVI has been stubbornly sideways for six months now between a range of 14,500 and 16,000, but there have been some notable shifts in the types of tenders within the aggregate index.
The big discussion among FreightWaves analysts currently is surrounding the divergence between tender rejections and spot rates. Over the past years, the FreightWaves Outbound Tender Reject Index (OTRI) has been one of the best directionally leading indices for spot rates available and has been highly correlated with spot rates.
Rising contract rates obviously play a major role, but there is a slightly less obvious factor contributing to increasing carrier compliance — a length of haul mix shift. Since April 1, tenders for loads moving less than 250 miles from origin have outpaced all other lengths of haul. In fact, over the past four months, loads moving less than 250 miles have grown 11%, while tenders for all longer lengths of hauls contracted.
Long haul (LOTVI) — loads moving over 800 miles.
Tweener (TOTVI) — loads moving between 450 and 800 miles.
Short haul (SOTVI) — loads moving between 100 and 250 miles.
Beginning in the second quarter, there was a notable shift in the types of loads shippers were tendering. Why would this assist with increasing compliance?
As the Sultan of SONAR, Zach Strickland, explained in his Chart of the Week, “Loads that move within a day’s travel do not have as large of an impact on capacity as loads that move more than a day away — roughly 500 miles. Drivers theoretically should be able to drive back to the origin within a 24-hour period on loads that move less than 250 miles, keeping capacity in the same market.”
There are a number of crisscrossing factors at play here. Strickland’s analysis isn’t meant to prove lengths of haul are the main reason for elevated contract compliance, but they are definitely a contributing factor as demand outpaces supply.
Why are shippers seeking shorter LOHs? To better understand the LOH shifts, I must point to the Savannah, Georgia, market several weeks ago. Ports along both coasts have benefited from shippers seeking alternate import routes to avoid port congestion. The Port of Savannah has been a major beneficiary, and shippers have leveraged it to fulfill East Coast demand.
In May, FreightWaves analysts noticed a strange occurrence in the Savannah tender rejection data: The aggregate outbound index for the market was markedly higher than the rejection rate for all the major lanes out of Savannah. The reason for this was all the new lanes being created out of Savannah to previously uncommon destinations. These new lanes were outside of established carrier networks and were rejected at a much higher rate than the popular lanes out of Savannah, which pushed the aggregate rejection rate higher than major lane pairings.
As shippers switch ports, they also change the entire path freight takes to its final destination. For example, if freight with a final destination of Oklahoma City is rerouted from Los Angeles/Long Beach to Savannah, that freight will take a very different route.
Changes to import paths are likely contributing to much of the length of haul shifts. As shippers seek out other port options besides LA/LB, they must look at their demand and understand where product must be placed. Given the growth in shorter LOHs in Los Angeles and Ontario, California, I suspect that shippers are bringing more freight through the West Coast for the West Coast. Imports to the region are more likely to stay closer to the port than this time last year or anytime prior. Additionally, given the intermodal congestion out of LA, shippers may be seeking to shelve imports in warehouses near the region for the time being, keeping the length of hauls short. However, warehouse capacity in Ontario is the tightest in the country with a 1.7% vacancy rate, according to Cushman & Wakefield.
Despite mixed economic data releases over the past several weeks, my outlook is unchanged: There is simply too much demand for capacity to meet right now. Carrier compliance has improved significantly since April due to higher contract rates and a higher mix of shorter lengths of hauls. But we are now entering the beginning phase of what should be a record-setting holiday peak season, and we will likely see a trend reversal in length of hauls. As shippers get closer to peak season, they’ll be moving more freight at longer distances to ensure it’s in place.
Tender rejections: Absolute level positive for carriers, momentum positive for shippers
The Outbound Tender Reject Index (OTRI) is at its lowest point in over a year, but remains elevated on a historical basis at 20.8%, meaning carriers are still rejecting 1-in-5 electronically tendered loads at contract rates. This is a significant improvement from July 1, when OTRI hovered above 25%.
As detailed above, a higher mix of shorter lengths of hauls is playing a part in improving compliance, but OTRI retreating is largely a function of higher contract rates.
Rejection rates have declined, but carriers are still in a dominant position when negotiating rates. One of the newest indices in SONAR, our Capacity Trend Market Score data, suggests that despite the rejection rate being lower in most major freight markets versus the national average, the ball is still squarely in the carriers’ court. Ontario, Atlanta, Harrisburg, Pennsylvania, and Dallas all have trend scores above 80.
By mode. Relative capacity changes in each of the three major trailer types have been similar since the beginning of June. Dry van and reefer rejections have been moving downward together for several months. After topping 50% in March, reefer rejections have tumbled to a still stubbornly high 31.6%.
Flatbed tender rejections have walked the x-axis since mid-June and remain very high from a historical standpoint at 22.2%. As the manufacturing sector ramped up in earnest early in the year, flatbed tender rejections slowly rose but have shown little signs of volatility in the past month.
Dry van, which makes up a supermajority of the overall rejection index, has been volatile, but the trajectory has been fairly stable over the past several months. The trend is certainly down but coming from a lower high so the pace of correction is slower than reefer.
The FMCSA data indicates that trucks are being added to the for-hire trucking market, but not by new fleets and not nearly at a rate fast enough to match demand growth. Since the beginning of the year, more than 42,000 tractors have been added to the for-hire market; 39,000 of these tractors came from existing fleets (at least 18 months old). Year-to-date, the for-hire market has grown 2.6%, while OTVI has expanded more than 12%. Calling the issue a driver shortage is simplistic and misguided; carriers are trying to respond, but there is simply too much demand to match capacity.
Freight rates: Absolute level and momentum positive for carriers
Both spot and contract rates are at all-time highs, according to Truckstop.com spot rates and FreightWaves contract rates. After the Fourth, I wrote that I didn’t expect to see spot rates test the recent all-time high until Q4, but I was obviously wrong. The Truckstop.com national average dry van rate sits at $3.33/mile, inclusive of fuel, tied for an all-time high. Contract rates have risen 8% since May 1, to $2.60/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.
Of the 100 spot market lane pairings available in SONAR, just over half were positive week-over-week. Rates out of Los Angeles have persistently led the grouping, and nearly every lane out of LA rose this week. There aren’t many catalysts pointing toward meaningfully lower spot or contract rates anytime soon.
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