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: 70 (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:
Volumes decline sharply due to Thanksgiving
The Thanksgiving holiday noise continues to disrupt the Outbound Tender Volume Index (OTVI). OTVI, a seven-day moving average of shippers’ requests for capacity, suffers on holidays due to days with essentially no tenders being included in the average. This caused OTVI to tumble by over 18% on Thursday and continue to fall further on Friday.
Both the weekly and monthly comps are basically impossible to make because of the holiday week. Just in the past week, tender volumes have fallen 26% due to the rapid decline around the holiday. Compared to the end of October, tender volumes are running down 27.5%. Prior to Thanksgiving, tender volumes were up over 0.5% month-over-month (m/m), so it shows that the pullback in freight volumes is being driven by the Thanksgiving holiday. During the back half of this week, tender volumes will erase the holiday noise and have a sharp snapback.
The pullback in volumes is in line with what happened a year ago. Tender volumes nearly always go through a stark fall-off around holidays, though the pullback in both 2020 and 2021 around Thanksgiving was quite drastic. Tender volumes are down nearly 10% year-over-year (y/y), which is the widest the gap has been. Tender volumes are more than 44% higher than they were in 2019. Even with the pullback in tender volumes, they are 6% higher than the pre-Thanksgiving peak in 2019.
Adjusting OTVI, which includes both accepted and rejected tenders, by the tender rejection rates shows the true level of freight moving through networks. Over the past week, accepted freight volumes have decreased by 25.4% due to the holiday but did see some daily upticks over the weekend. With Thanksgiving just a day different from in 2020, accepted freight volumes are down just 0.5% y/y, compared to the 16% y/y drop on Thursday.
Where do volume levels go from here?
Initial reports around Cyber Monday are weak compared to expectations. According to Adobe Analytics, Cyber Monday sales fell 1.4% y/y, the first decline on Cyber Monday since tracking began in 2012. There is reason to believe that spending is still happening but is spread across more days, not just Black Friday and Cyber Monday.
Backlogs are still being worked through at the ports, while inventory levels remain at historically low levels. Upticks in ocean bookings in recent weeks will likely keep capacity on the ocean tight but impact the backlogs at the ports as well ahead of the Lunar New Year. Additionally, inflation concerns are starting to dramatically impact consumer sentiment, though that sentiment hasn’t spilled over to retail sales or Bank of America’s total card spending, which are still running up over 16% y/y.
Tender volumes will likely stay at these higher levels (especially compared to 2019) for a prolonged period given the strong demand on the ocean and depleted inventory levels. However, Walmart, one of the largest retailers in the country, said that throughput at the ports has improved over the past four weeks and inventory levels are up 10% y/y. Adding in the $1.2 trillion infrastructure package, there is the possibility for pockets of strength in tender volume levels into 2022.
As expected, tender volumes in the overwhelming majority of the country are lower w/w due to the Thanksgiving holiday. Of the 135 freight markets tracked by FreightWaves SONAR, only two have had tender volumes higher over the past week: Green River, Wyoming, and Rapid City, South Dakota.
It really isn’t beneficial to compare tender volumes in markets with where they were last week. However, comparing tender volumes to year-ago levels gives insight into how the markets are holding up. In the Atlanta and Ontario, California, markets, tender volumes are down 7% y/y.
The largest markets in Texas are holding up well compared to 2020. Dallas and Houston, the two largest markets in the state, are up roughly 1% y/y. The Port of Houston has had customs import shipments up 31% y/y. Tender volumes in Fort Worth, the third-largest market in the state, are up over 25% y/y, the largest y/y increase of any of the 20 largest freight markets in the country.
By mode: During the past week, reefer volumes have had the largest single-week decrease in more than a year. Reefer tender volumes are down 22.68% over the past week but fell by over 15% on Thanksgiving alone. The new omicron variant that is threatening the country may impact the reefer market through a recovery in grocery spending. Add in the winter weather and the need to protect goods from freezing, and reefer volumes may hold up better than expected throughout the next three months.
Dry van volumes have followed a similar trend, falling 25.93% over the past week. That decrease is less extreme than both the Thanksgiving and Christmas holiday weeks in 2020. This is a positive sign for dry van volumes, even though the Dry Van Outbound Tender Volume Index (VOTVIY) is still down over 5% y/y.
Relative capacity follows seasonal trend after Thanksgiving
A lot like previous years, the capacity situation didn’t really worsen or improve around the Thanksgiving holiday. Traditionally, the Outbound Tender Reject Index (OTRI) peaks just ahead of the Thanksgiving holiday as lead times are increased and falls off in the week following the holiday. That hasn’t necessarily been the case the past two Thanksgivings as rejection rates have stayed at elevated levels for nearly a week following the holiday.
Over the past week, rejection rates have fallen by just 27 basis points (bps), to 19.97%. For much of the past month, rejection rates have hovered around the 20% mark, which is still remarkably tight, all things considered. Even though capacity remains extremely tight in the market, rejection rates are still nearly 800 bps below where they were in 2020.
The loosening of relative capacity over the past eight months can largely be attributed to the contract rates being repriced higher over the course of the year. The decrease in rejection rates has also led to spot rates starting to decline after the Labor Day holiday.
Another way to look at the capacity situation is through Outbound Tender Lead Times (OTLT), which gives more insight into shippers’ view of the market. When shippers are concerned about securing capacity, tender lead times are pushed further out in advance. Tender lead times reached 3.5 days around Thanksgiving but have since started to shorten as drivers are returning to the road.
Another factor driving the capacity situation is the backlogs of new Class 8 orders that have surged past 2020 levels but are unlikely to reach the 2018 levels that led to oversupply in the market in 2019 and a record number of bankruptcies as the market loosened. The backlogs are pushing builds into the back half of 2022 and likely beyond, which will probably not cause a complete influx of capacity.
Ultimately, capacity conditions are still quite difficult in the market but are easing as there is capacity returning to the market. The first quarter of the year tends to lead to loosening of capacity, and it will likely continue that seasonal trend this year. How low rejection rates go remains to be seen, but the likelihood of setting new rejection rate highs seems minimal.
Rejection rates across the country have started to fall after tightening for the holiday week. Of the 135 markets tracked in FreightWaves SONAR, 63 reported higher rejection rates w/w.
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.
After tightening over the past week, relative capacity in Southern California continues to loosen faster than in other markets of like size. Over the past week, rejection rates in both Ontario and Los Angeles have fallen by 273 bps. Rejection rates in the markets are down to 15.78%, more than 1,100 bps lower than they were a year ago.
The Atlanta market, the second-largest in terms of outbound tender volumes, has tightened faster than other markets. Over the past week, rejection rates in Atlanta have increased by 149 bps. The rejection rate in the market comes in at 17.67%, the highest it has been in more than a month. Rejection rates are still 800 bps below year-ago levels, but this seems to be the norm at the moment across most markets.
By mode: Securing reefer capacity appears to be getting easier after the Thanksgiving holiday. The Reefer Outbound Tender Reject Index (ROTRI), a measure of relative reefer capacity in the market, fell by 155 bps over the past week to 35.71%. The capacity conditions in the reefer market continue to be quite difficult as highlighted by the rejection rate in the mid-30% range, but compared to earlier in the year, conditions have improved for shippers.
The Van Outbound Tender Reject Index (VOTRI) is relatively unchanged from last week. Van rejection rates fell just 10 bps, which is a small move, especially compared to the other two equipment types. The largest equipment type within SONAR has been the least volatile in terms of capacity changes since March. Overall, van rejection rates are still down nearly 800 bps y/y and will likely continue to decline through the rest of the year and into the first quarter of 2022.
The flatbed market tightened significantly over the past week as rejection rates increased by 420 bps w/w. This was the largest weekly increase since early October and set an all-time high. Flatbed rejection rates increased to 31.62%, which is more than 1,700 bps higher than they were a year ago. The tightening of capacity in the flatbed market is going to put further pressure on rates moving into 2022.
Spot rates move higher during the holiday week
The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week’s data.
The Thanksgiving holiday has dramatically impacted spot rates, even though rejection rates and volume levels are lower this week. Truckstop.com’s national spot rate increased by 7 cents per mile, coming in at $3.47 per mile, including fuel and other accessorials. This was the first uptick in Truckstop.com’s national spot rate in more than a month. The uptick in spot rates is similar to what happened in 2020 around the Thanksgiving holiday, but spot rates in 2021 are still 14% higher y/y.
Of the 102 lanes from Truckstop.com’s load board, 69 reported increases last week. Outbound of Los Angeles took a step higher on seven of the eight lanes, with the lane of Los Angeles to Denver erasing part of last week’s increase, falling 13 cents per mile, to $4.88. The increases out of Southern California are no surprise given that capacity tightens ahead of the holiday before other markets in the country. Expect that rates will slowly fall over the next couple of weeks before popping back up before the Christmas holiday.
Contract rates did fall by 1 cent per mile over the past week, to $2.69. Contract rates are reported on a two-week lag, so the impacts of Thanksgiving have yet to materialize but expect them to experience a bump over the next couple of weeks.
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 20% higher than in 2020.
FreightWaves released the Trusted Rate Assessment Consortium (TRAC) spot rates recently during the F3 Virtual Experience. The spot rates are the average buy rate derived from 3PLs’ and freight brokerages’ reported booked and covered dates. FreightWaves TRAC rates are updated daily and weighted based on proximity to a specific origin/destination with a maximum of 300 miles and length of time to the current date.
FreightWaves TRAC provides average all-in spot rates for more than 650,000 unique van lanes and over 300,000 unique reefer lanes. Additionally, it provides a range, with the low rate representing the 33rd percentile and the high rate representing the 67th percentile. FreightWaves TRAC provides a confidence score between 1 and 5, with 5 being high confidence, based on the metadata to determine the rate.
The chart above is the FreightWaves TRAC rate from Los Angeles to Dallas, showing that the current rate is $4.12 a mile with a confidence score of 5, an increase of 2 cents per mile over the past week. This lane has a lot of volume moving from a tight radius, which leads to the high confidence score in the rate.
Other dense lanes, like Atlanta to Philadelphia and Chicago to Atlanta, experienced upticks in FreightWaves TRAC rates over the past week. The Atlanta to Philadelphia lane increased 7 cents per mile, to $3.64, and the Chicago to Atlanta lane increased 1 cent per mile, to $4.05.
Ultimately, some of the inflationary pressures on rates have alleviated themselves as capacity has returned to the market. Pressure remains on contract rates to move higher in 2022, due to the elevated rejection rates, but the move higher may not be as pronounced as it was in 2021. Either way, carriers still hold most of the pricing power in the market, though shippers are slowly clawing it back in their favor.
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