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 start the seasonal move higher
True to seasonal form, tender volumes are ramping up ahead of the Thanksgiving holiday on Thursday. The Outbound Tender Volume Index (OTVI), which measures shippers’ requests for capacity, increased by 2.51% week-over-week (w/w), the largest single-week increase since the middle of September.
The increase in tender volumes levels is a traditional move, as shippers tend to put out more tenders, at the risk of more being rejected, during the holiday week. Tender volumes outside of the past week have largely been in a decline since the Labor Day holiday. Even with the increase over the past week, tender volumes have still slid by over 1% during the past month.
What comes next is what will be interesting. Freight volumes traditionally slide off the peak during December. Tender volumes as a whole have been underwhelming during the fourth quarter, which was expected to be quite strong. Conversely, domestic intermodal volumes have moved contrary to seasonality. Daily domestic intermodal volumes, which are competitive with long haul truckload moves, increased by 8.5% in October and have since risen by 2.4% in November.
Intermodal networks have been dealing with congestion, leading to increased pressure on the truckload market. Railroads have taken numerous steps, including reopening shuttered intermodal facilities to improve network fluidity. The measures are having an impact on the intermodal volumes and likely impacting the slowdown in tender volumes over the past two months as well.
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 increased by 1.8%, outpacing total tender volumes. More freight is still moving through the networks compared to a year ago, currently up 4.8%, as rejection rates are well off the highs and tender volumes remain at higher-than-normal levels.
Where do volume levels go from here?
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 also 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 volume levels will likely stay at these higher levels (compared to 2019 and 2020) for a prolonged period given the strong demand on the ocean and depleted inventory levels. Adding in the $1.2 trillion infrastructure package, there is the possibility for pockets of strength in tender volume levels into 2022.
Across the country, volume levels in 77 of the 135 markets tracked by FreightWaves SONAR were higher over the past week. The largest freight markets in the country had a particularly strong week, especially at the major port markets.
The two large Southern California markets, Ontario and Los Angeles, have seen freight volumes grow over the past two weeks. During the past week, volume growth accelerated as tender volumes in Ontario increased 15.9% w/w. In Los Angeles, tender volumes were up 10% w/w. As Thanksgiving rapidly approaches, one last surge ahead of the holiday has led to the rapid rise in these two markets. Even with this week’s increase, tender volumes in the market are well below where they were in 2020, down 5.1% y/y in Ontario and 8.5% y/y in Los Angeles.
Houston, home to one of the largest port complexes in the country, experienced the largest weekly increase in tender volumes across the 20 largest freight markets. Tender volumes in Houston increased by 25% w/w. The recent increase brings tender volumes positive on a y/y basis, now up 5%.
In Elizabeth, New Jersey, the volatility remains. Over the past week, tender volumes in Elizabeth increased by 6.1% w/w. On a two-week basis, tender volumes are still down 4% after the significant pullback last week.
By mode: Much like the overall tender volume index, reefer volumes found some positive momentum over the past week. The Reefer Outbound Tender Volume Index (ROTVI) increased by 1.19% w/w, but volumes are still down 14% y/y. Demand for temperature-controlled units traditionally picks up in the winter months as shippers protect goods from freeze, so there may be prolonged upward pressure on reefer demand.
Dry van volumes continued their recovery over the past week as the Van Outbound Tender Volume Index (VOTVI) increased by 2.25% w/w. Much like the reefer market, van volumes are underperforming year-ago levels, down 7%. If the holiday retail season is as strong as expected, anticipate dry van volumes to pick up throughout the rest of the year.
Relative capacity tightens ahead of the Thanksgiving holiday
After a week of solid increases, the Outbound Tender Reject Index (OTRI), a measure of relative capacity, has started to plateau. Over the past week, the rejection rate has increased by 54 basis points (bps), to 20.44%.
Much like tender volumes, rejection rates are behaving in a seasonal pattern. Rejection rates in the two previous years increased during the week leading up to Thanksgiving before plateauing during Thanksgiving week. As drivers come off the road for the holiday, rejection rates tend to rise and correspond to an increase in spot rates.
In 2020, rejection rates at this same time increased nearly 180 bps ahead of the Thanksgiving holiday, so the move in 2021 has been muted in comparison. That said, higher contract rates have driven improved carrier compliance throughout the past six months.
Another way to look at the capacity situation is through Outbound Tender Lead Times (OTLT), which gives more insight into the shippers’ view of the market. When shippers are concerned about securing capacity, tender lead times are pushed further out in advance. As of right now, tender lead times are over three days, which is typical around holidays, due to the difficulty of finding drivers. Even as rejection rates have pulled back, tender lead times have increased in recent months, signaling that the capacity situation is still quite difficult.
New capacity is entering the market; however, OEMs are continuing to work through backlogs, pushing some new Class 8 truck orders to the end of 2022. Additionally, the used truck market is white-hot, due to limited turnover, driving used equipment prices higher and higher.
Ultimately, conditions are still difficult but have eased significantly over the past month or so as capacity has returned to the market. This trend will likely continue into 2022, but much like in 2021 an unforeseen catalyst could throw a wrench into the capacity front.
A wave of tightening relative capacity swept the country over the past week, which is normal ahead of the Thanksgiving holiday. Of the 135 markets within SONAR, 87 experienced rejection rate increases this 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.
In Southern California, capacity traditionally tightens earlier than in other markets as drivers tend to avoid the market ahead of holidays when trying to stay closer to home. In Ontario and Los Angeles, rejection rates increased 253 bps w/w, but anticipate the increase to continue throughout the next week. Rejection rates are still more than 700 bps below year-ago levels.
Denver, the 21st largest freight market by outbound volume, experienced significant tightening over the past week. Rejection rates in the market increased by 420 bps, the 11th-largest increase of all markets over the past week. Rejection rates in the market are still over 1,400 bps below year-ago levels, but severe winter weather over the coming months could cause another wave of tightening in the market.
By mode: Reefers were the only one of the three equipment types whose rejection rates fell over the past week. The Reefer Outbound Tender Reject Index (ROTRI) fell by 34 bps w/w to 38.18%. The national reefer rejection rate is still more than 1,000 bps below where it was a year ago. Overall, the tightness in the reefer market hasn’t disappeared. The capacity situation has actually become more difficult in recent months after ROTRI fell to ~30% in early August.
The rebound in dry van rejection rates continued this week. The Dry Van Outbound Tender Reject Index (VOTRI) rose by 56 bps over the past week to 19.52%. The largest equipment type in SONAR has been the most stable for the past year, but the recent jump in rejection rates signals that tightening capacity. Peak season traditionally leads van rejection rates to climb as drivers come off the road for the holidays.
The flatbed market has ratcheted tighter as rejection rates took a significant step higher over the past week. The Flatbed Outbound Tender Reject Index (FOTRI) increased by 346 bps over the past week to 28.73%, just 46 bps off the year-to-date high set at the end of October. 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 1,350 bps higher than 2020 levels.
Spot rates plateau even though rejection rates moved higher
The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week’s data.
Despite tender rejection rates moving higher last week, spot rates have seemingly plateaued. Truckstop.com’s national spot rate was flat this week, coming in at $3.38 per mile, including fuel and other accessorials. Even with the plateauing in Truckstop.com’s spot rate this week, rates are still 17% higher than they were last year.
Of the 102 lanes from Truckstop.com’s load board, 46 reported increases last week. Outbound of Los Angeles took a step higher on five of the eight lanes, with the lane of Los Angeles to Denver increasing the most, rising 41 cents per mile, to $5.01. The increases out of Southern California are no surprise given capacity has really started to tighten ahead of peak season.
Upward pressure on rates this week will intensify as drivers come off the road for the holiday. The likelihood of rates approaching the peak of $3.60 a mile around the Labor Day holiday is slim, given the capacity situation has improved and freight volumes have yet to surge to extremely high levels that many expected.
Contract rates started to move higher this week, increasing by 5 cents 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 19% higher than in 2020.
FreightWaves released the Trusted Rate Assessment Consortium (TRAC) spot rates two weeks ago 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 $4.10 a mile with a confidence score of 5. This lane has a lot of volume moving from a tight radius, which leads to the high confidence score in the rate.
Ultimately, some of the inflationary pressures on rates have alleviated themselves as capacity has returned to the market. Pressure still 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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