This week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)
Last week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)
Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 40 (Shippers)
The FreightWaves 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:
Despite gain in overall volume, accepted freight still down on a yearly basis
Tender volumes have climbed up to a point they have not been since the beginning of April, thanks in part to shippers rushing to move loads before Monday’s federal holiday. Nevertheless, both the Outbound Tender Volume Index (OTVI) and true shipment flow are still below year-ago levels.
OTVI rose 3.97% on a week-over-week (w/w) basis, mirroring the last-minute w/w rally seen at the end of last month. On a year-over-year (y/y) basis, however, OTVI is down 17.82%. Comparisons on a y/y basis can be thorny because OTVI can be inflated by an uptick in tender rejections. At this time last year, OTVI was greatly inflated by rising tender rejections, whereas rejection rates have since nose-dived to incredible lows.
Looking at accepted tender volumes, which is OTVI adjusted by the Outbound Tender Reject Index (OTRI), we see a gain of 3.6% w/w but also a dip of 0.6% y/y. Given that the current week signals shippers’ preparations for the first big shopping season of the summer — Memorial Day — this period is a crucial one for yearly comparisons. Considering the economic pressures on consumers that were not present last year, a 0.6% y/y dip of accepted freight is not as terrible as it could have been.
Orders for durable goods, such as household appliances, televisions and computers, did rise in April. One fear of retailers was that consumers had satiated themselves on big-ticket items after a flurry of spending early in the pandemic. Retailers’ ensuing rush to stock durable goods, or products that are meant to last three or more years, are a significant factor in the warehousing space crisis: Durable goods are substantial in both cost and size and do not usually move through the supply chain as quickly as consumer packaged goods and produce.
But retailers’ (justified) fears of supply chain instability led them to overstock on their durable goods inventory, just when consumer demand had slowed due to satiety and inflationary pressures. Consumer demand could indeed be slowing down, since orders for durable goods (excluding aircraft) were up by only a slight 0.3% month-over-month in April. However, it should be noted that even a slight gain in orders is unseasonable. Typically, demand for nondefense durable goods falls in April before ratcheting up in June. In a market that is starved for good news, especially after the disappointing Q1 earnings from Target and Walmart, any win is a win.
Of the 135 total markets, 81 reported weekly increases as freight demand ramps up for the summer holiday.
After months of middling freight demand, Ontario, California, finally posted big gains in tender volume this week. Ontario, which handles freight from the ports of Long Beach and Los Angeles, saw volumes rise 8.7% w/w. Harrisburg, Pennsylvania, which performs a similar role for the Port of New York and New Jersey, likewise saw a 8.4% w/w rise in volume.
Detroit is arguably the biggest winner this week. Volumes throughout all of Michigan have been inconsistent over the past month, marred alternately by tornadoes and flooding and then by hot, dry streaks that threaten spreading wildfires. This week, Detroit reported a sizable 65.6% w/w gain in volume. Atlanta was one of the only major outbound markets that saw a decline in volume this week, which is unusual to see among gains in California, New England and Texas. This week, Atlanta saw a 2% w/w decline in freight demand.
By mode: Reefers continue to be an exception, as they are shut out of this late-May rally seen in freight demand. To be sure, the Reefer Outbound Tender Volume Index (ROTVI) did see a 2.73% w/w jump, but this gain only puts ROTVI back to end-of-April levels. Reefer volumes have been frustratingly flat throughout May, an unexpected trend to see during the early produce season. ROTVI is also down by 36.24% y/y, though much of that difference can be attributed to 2021’s inflated rejection rates.
Van volumes, on the other hand, are driving the general rally of the overall OTVI. The Van Outbound Tender Volume Index (VOTVI) is up 4.82% w/w, back to levels last seen in the first week of April. VOTVI is down 16.2% y/y, but as is the case with ROTVI, much of that difference comes from last year’s rampant rates of tender rejections.
Has the floor been found for tender rejection rates?
After nose-diving to levels just above 8%, OTRI has since bounced back and regained a percentage point. This bounce could imply that rejection rates will not fall below 8% in the near future, as carriers are currently squeezed by rising diesel prices and other operational costs.
Over the past week, OTRI, which measures relative capacity in the market, rose to 8.94%, a change of 33 basis points (bps) from the week prior. OTRI is still 1,554 bps below year-ago levels as a return to double-digit percentages seems unlikely.
After months of stalemate, activity has resumed around California’s controversial AB5 bill, the enactment of which could seriously disrupt truck capacity and rates. The law, if enacted, would apply to all carriers that move loads in California, regardless of whether they are based in the state or not. Given that the ports of Los Angeles and Long Beach are responsible for the bulk of import volume in America, AB5 would likely have ripple effects throughout the nationwide industry.
In brief, the law threatens to recategorize certain owner-operators (a substantial portion of truck drivers) from independent contractors to full-time employees. As full-time employees, these owner-operators would be entitled to salaries and other benefits, the cost of which would likely be passed onto shippers and brokers. The law is currently in limbo, however, as the related case awaits a possible review from the U.S. Supreme Court. In November, the Supreme Court asked the U.S. solicitor general, Elizabeth Prelogar, to opine on whether the court should review this case. On Tuesday, Prelogar stated her opinion that the Supreme Court should not review the case. If this opinion is followed, then the current injunction against AB5 will expire and the law will go into effect immediately.
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. As capacity is generally finding freight, both Florida and Eastern seaport markets this week posted blue markets, which are the ones to focus on.
Of the 135 markets, 80 reported higher rejection rates over the past week after a sudden surge in freight volume.
Freight demand stirred in Florida, especially in the Lakeland market, which is the largest outbound market for refrigerated freight. Unfortunately, Lakeland’s gains were not significant enough to reverse the stagnation in the overall reefer market, as noted above. Even still, rejection rates spiked in Florida over the past week.
Seaport markets on the East and Gulf coasts also saw a swell of tender volumes accompanied by a rise in rejection rates. Savannah, Georgia, posted a 8.7% w/w gain in freight demand as well as a major boost of 331 bps in its local OTRI. Similarly, New Orleans saw an incredible 27.5% w/w increase in tender volume and a coinciding 325 bps gain in its local OTRI.
By mode: Despite an uptick in the overall OTRI, flatbeds saw a slight w/w decline while reefers and vans only saw a minor w/w increase. The Flatbed Outbound Tender Reject Index (FOTRI) fell 16 bps w/w to 29.36%, although FOTRI has been consistently inconsistent for the past couple of months. Industrial demand is still robust and housing starts are currently elevated, so flatbeds should continue to be in demand over the coming months.
The Reefer Outbound Tender Reject Index (ROTRI), however, has flattened out over the past two weeks, rising only 14 bps w/w to 9.52%. Likewise, the Van Outbound Tender Reject Index (VOTRI) only rose 21 bps w/w to 8.81%. On a y/y basis, VOTRI is down 1,638 bps while ROTRI is down a shocking 3,159 bps.
In a flash, ‘blitz week’ rate acceleration shifts down
The momentum established through “blitz week” has stalled out in the following week ahead of Memorial Day weekend. Next week is typically one of the stronger weeks of the year for rates as the summer shipping season gets kicked off and capacity comes off the road as drivers take vacations.
Over the past week, the NTI has increased by just a penny per mile, rising to $2.92 per mile. The NTI reached $2.96/mi earlier in the week before giving up the momentum heading into the weekend. There was a bump during the week of Memorial Day in 2021 of ~25 cents per mile, so there is anticipation of another increase over the next week, though the capacity situation, as measured by rejection rates, hasn’t experienced significant tightening yet.
The NTIL, which is the linehaul rate, removing fuel from the all-in NTI, is up 1 cent per mile as well, indicating that the changes in rates this week were driven by actual linehaul rates as opposed to changes in fuel.
The NTI currently sits 13 cents per mile below year-ago levels, equal to a 4.3% decline y/y. As spot rates hit inflection points, both turning negative on a y/y basis and falling below contract rates for the first time since 2020, the pressure to move contract rates intensifies.
Over the past week, contract rates increased by 1 cent per mile as well to $2.91, which is the base linehaul rate as well. It’s widely documented that contract rates succumbed to the upward pressure thanks to rising spot rates, rising to new record highs as well. Contract rates currently stand 16% higher than year-ago levels, but that gap should start to dissipate in the coming months against difficult comps.
FreightWaves released a new index in SONAR this week that shows the spread between the NTIL and dry van contract rates. The index fell to its lowest level in the data set, which dates back to early 2019. Throughout 2019, contract rates exceeded spot rates, which led to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to new record highs on a seemingly weekly basis, while contract rates slowly crept higher throughout 2021.
Once spot rates started the rapid descent from the stratosphere in late February, the spread between contract rates and spot rates narrowed as contract rates continued to increase throughout the first quarter. This caused the spread between contract and spot rates to turn negative for the first time since July 2020.
The spread quickly fell to -$0.89, a level where it still stands today. The spread being this wide will place downward pressure on contract rates as the calendar turns to the back half of the year.
The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, continued to slide this week. Over the past week, the FreightWaves TRAC spot rate declined by 3 cents per mile to $2.56, adding to last week’s decline. Compared to the NTID, the National Truckload Index – Daily, rates from Los Angeles to Dallas are depressed compared to the national average as expected, but that wasn’t the case to start the year. As carriers flooded Southern California at the beginning of the year, they pushed spot rates down rapidly.
On the East Coast, especially out of Atlanta, rates are gaining some traction ahead of the holiday weekend. The FreightWaves TRAC rate from Atlanta to Philadelphia increased 14 cents per mile to $3.42, adding to last week’s 4 cent-per-mile increase. Carriers are showing some restraint heading into the Northeast as diesel prices are extremely high and reserve levels are depressed.
As capacity conditions change over the next week, expect that there will be upward pressure short-term pressure on spot rates. The time frame between Memorial Day and July 4 will be important for spot rates to gain any semblance of momentum to carry into the back half of the year.