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:
Tender volumes pick up, but not enough to keep the wolf from the door
After the depression induced by Memorial Day had passed, tender volumes bounced back to levels not seen since early April. The Outbound Tender Volume Index (OTVI) is now above 13,000; when compared to OTVI languishing in the 12,000s throughout most of April and May, freight demand seems to be in an all right spot right now. Several warning signs are, however, on the horizon for a drastic tumble in volumes.
OTVI rose 15.94% on a week-over-week (w/w) basis, though a large share of that gain can be chalked up to a hindered performance during last week’s holiday. On a year-over-year (y/y) basis, OTVI is down 17.18%. 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 an expected gain of 16% w/w but also a dip of 2.6% y/y. More interestingly, perhaps, we see a healthy gain of 5% on a month-over-month (m/m) basis. This monthly comparison is interesting because freight demand usually ramps up in April and builds on itself during May and June.
While this current m/m gain should not be surprising, given normal seasonality, it is surprising because tender volumes have somewhat defied typical seasonality this year. The only glimpse of normalcy thus far had come ~10 days before Memorial Day, when accepted volumes were up m/m by a similar amount. But even this stretch was not terribly impressive. For one, the Memorial Day weekend is a major period for retail and volumes should have ramped up regardless of external pressures. Also, that run faced easy comps, since accepted volumes in mid-to-late April were truly abysmal. So current m/m gains are something of an exception this year and could stoke hope in carriers and shippers alike.
To counterbalance this optimism, however, there are some worrying signs for lower volume in the months to come. U.S. import demand is tumbling, not only because of China’s lessened output but also because of inflationary pressures backing American consumers into a corner. This import volume is a major driver behind over-the-road truckload volume, as one of the biggest outbound markets in the country — Ontario, California — grew on the strength of imports coming into the ports of Los Angeles and Long Beach.
There are also signs that have been foreshadowed over the past few months: namely, that U.S. consumer spending habits are moving away from goods to services, leaving both retailers and manufacturers with an “inventory glut” on their hands. Excepting a period in late 2021 when inventories were built like war chests amid fears of supply chain disruptions, the Institute of Supply Management’s Manufacturing Inventories Index is currently at its highest levels since early 2018. Target, meanwhile, announced that it prefers to take short-term hits to profit in order to “optimize” and “remove the excess inventory,” according to CEO Brian Cornell. Other retailers, like Walmart, are in a similar position.
Of the 135 total markets, all but nine reported weekly increases against easy comps over a holiday-affected week.
Since it was easy for markets to gain volume on a w/w basis, it is worth looking at those markets that underperformed. Allentown, Pennsylvania, which is the nation’s fourth-largest market by outbound volume, saw volumes rise by a scant 5.5%, well under the national average of 16%. Worse still, San Antonio — a midsize market known for manufacturing machinery for oil and gas companies — actually saw volumes contract 3.15% w/w.
By mode: Reefer volumes remained more robust than expected during the week of Memorial Day, briefly shaking off months of concerning sluggishness. But it appears that reefers are now back to a disappointing mediocrity, as they are now below the levels set immediately prior to the federal holiday. At present, the Reefer Outbound Tender Volume Index (ROTVI) is up 4.2% w/w over easy comps, but is also down 33.5% y/y. Even still, the y/y comparison is not as drastic as it might seem, given that last year’s ROTVI was heavily inflated by reefer rejection rates that have since fallen.
Van volumes, meanwhile, continue to fall in line with the trend of the overall OTVI, recovering from the Memorial Day week to levels two weeks prior. Aside from last week’s holiday, the Van Outbound Tender Volume Index (VOTVI) is up 18.8% w/w. As is the case with ROTVI, VOTVI is down 16.9% y/y but much of that loss can be chalked up to the decline of van rejection rates on a yearly basis.
Rejection rates take a major hit on Thursday
In the stretch between the start of 2022 to early May, OTRI had plummeted from over 22% to levels barely above 8%, a decline of almost 1,500 basis points (bps) in less than five months. At the time, it appeared that OTRI could continue to fall below 5%, as it did in 2019. Over the past month, however, it seems clear that OTRI has found its floor for the time being since carriers are squeezed by rising diesel prices and other costs to operate.
Over the past week, OTRI, which measures relative capacity in the market, rose to 8.76% on Wednesday but quickly fell to 8.46% on Thursday, a change of 18 bps from the week prior. OTRI is still 1,424 bps below year-ago levels, as neither a return to double-digit percentages nor a further decline below 8% seems likely in the near future.
According to the Logistics Managers’ Index (LMI), which is a monthly survey about market and supply chain conditions, trucking capacity is growing quickly on a m/m basis. LMI’s Transportation Capacity index has risen to levels not seen since the 2019 downturn in the trucking industry. Moreover, LMI’s Transportation Prices index is leveling out. Although the index is still above 50, indicating that prices are increasing, the index has reached its lowest level since May 2020 and is likely being sustained by rising diesel prices.
Speaking of rising diesel prices, on Monday the Energy Information Administration reported an all-time high national average. This week’s gain of 14.6 cents per gallon brought diesel to an average of $5.703 per gallon, handily trumping the previous record of $5.623/gal set on May 9. No immediate relief is in sight, given the European Union just passed limited sanctions on Russian petroleum.
The EU’s recent sanctions on Russia, which was the world’s largest exporter of oil globally as well as the third-largest producer of oil, will have ripple effects on global fuel prices — the United States not excepted. The U.S., the world’s largest producer of oil, will likely see any gains in domestic production shift toward European exports rather than domestic consumption.
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, a few regions this week posted blue markets, which are the ones to focus on.
Of the 135 markets, 69 reported higher rejection rates over the past week as freight volumes surged across the board.
Two minor port cities reported higher rejections this week. Baltimore, the larger of the two, saw volumes grow by 18.4% w/w and, consequently, saw tender rejections rise from 12% to almost 17%. New Orleans, while a large port for cruise passengers, is quite moderate among the nation’s container ports. For reference, it handles roughly 10% of the annual volume seen at the Port of Los Angeles, the nation’s busiest port. New Orleans is, however, a major center for shale plays in the Permian Basin. Given the oil and gas industry’s reliance on flatbeds, New Orleans’ overall rejection rate trends closely to the Flatbed Outbound Tender Reject Index (FOTRI).
By mode: Since April, flatbed rejection rates have been on neither a sharp decline nor a clear gain. In fact, FOTRI rose 109 bps w/w to 30%, a level near where it has been averaging in the past three months (31%). FOTRI is also up 76 bps y/y, making it the only mode to be in the black on such a basis.
Vans and reefers did not fare as well as flatbeds, taking major hits on Thursday. The Van Outbound Tender Reject Index (VOTRI) fell 27 bps w/w to 8.33%, although it is currently down a further 1,484 bps y/y. The Reefer Outbound Tender Reject Index (ROTRI) fell 194 bps w/w to 7.59%, nearly 3,000 bps below year-ago levels. This performance, while disappointing, is not surprising since reefer volumes have similarly been in a bad way.
Spot rates sluggish but certain lanes are sensitive to diesel prices
Amazingly, spot rates have remained relatively unchanged over the past three weeks. This stability actually indicates a slight decline in spot rates, given that the National Truckload Index (NTI) is inclusive of fuel and that diesel prices have just set a new high. If we have hit a new floor for fuel-exclusive spot rates, then any further change would likely not arrive until the Fourth of July, when some capacity is expected to go offline.
Over the past week, the NTI has fallen 2 cents per mile to $2.91 per mile. In 2021, after falling from a surge caused by Memorial Day capacity shortages, the NTI steadily climbed throughout the summer until September, when spot rates remained fairly stable until Christmas.
The NTIL, which is the linehaul rate that removes fuel from the all-in NTI, fell 4 cents per mile to $2.03/mi, indicating that nearly a third of spot rates are going straight to fuel payments. As expected, any changes in the NTI are currently due to declining linehaul rates.
Over the past week, contract rates, which are base linehaul rates like the NTIL, fell 1 cent per mile to $2.93/mi. Contract rates now stand 13% higher than year-ago levels, but they have not budged the needle dramatically since February, when shippers finally began to adjust their contracts to changing market conditions.
The chart above shows the spread between the NTIL and dry van contract rates. As can be seen, the index has continued to fall to new all-time lows 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 negative 87 cents, where it 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, barely changed at all. Over the past week, the FreightWaves TRAC spot rate increased by 1 cent per mile to $2.60. 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 was not the case at the start of the year. When carriers flooded Southern California in January, they pushed spot rates down rapidly.
On the East Coast, especially out of Atlanta, rates are gaining some traction but at a slower rate. The FreightWaves TRAC rate from Atlanta to Philadelphia rose 5 cents per mile to $3.61, less than the past two weeks’ 14 cent-per-mile increases. Carriers are showing some restraint heading into the Northeast as diesel prices are extremely high and reserve levels are depressed.