Although U.S. West Coast demand for intermodal rail service in late January might not be as tight as what the market witnessed in the fourth quarter of 2020, the spot market is still showing some signs of tightness, according to FreightWaves’ SONAR charts.
Intermodal tender rejection rates show that carriers are still struggling to meet customer commitments, according to Mike Baudendistel, FreightWaves’ market expert for rail and intermodal.
“Intermodal tenders are rejected by carriers at much lower rates, on average, than truckload tenders. For example, during all of 2020, only 1.7% of intermodal tenders recorded in SONAR data were rejected by carriers compared to 15.8% of truckload tenders that were rejected by carriers,” Baudendistel said.
“So while the current Los Angeles outbound intermodal tender rejection rate of 5.7% is well below the current outbound Los Angeles truckload tender rejection rate of 15.8%, it is still elevated compared to what is normal and is indicative of an intermodal market where carriers are struggling to meet customer commitments,” Baudendistel said. “For comparison, one year ago the LA intermodal outbound tender rejection rate was less than 2%.”
Union Pacific (NYSE: UNP) told investors during its fourth-quarter earnings call last Thursday that the congestion that it sees at California ports can be attributed to several factors, including chassis and container availability.
As containers come off the water and arrive at the port, some go on dock and are bound for rail and Union Pacific (UP), said Kenny Rocker, UP’s executive vice president for marketing and sales.
Meanwhile, other parts of that business are going into warehouses, Rocker said. However, some of those containers and chassis are not turning over and that is where the supply chain “is going off,” he said.
“We’ve seen some puts and takes in terms of chassis supply, but once it’s on our network … [UP] is really performing,” Rocker said.
Market tightness in the fourth quarter and peak season caused UP to apply surcharges to intermodal spot rates so that it could ensure that customers participating in UP’s mutual commitment program would receive the containers they requested.
UP has since removed those surcharges as demand eased in January, according to Rocker.
“During peak season, we ran into a scenario where we wanted to make sure those customers received them because of the high demand,” Rocker said. “Demand is tight right now, but it’s not as tight as it was in the peak season. So we’ve removed those surcharges and we want to go out there and grow.”
Indeed, according to the SONAR indices tracking domestic intermodal spot rates for 53-foot containers from Los Angeles to three dense outbound lanes, prices have fallen from their highs in November and December. After UP rescinded the surcharges on spot intermodal loads effective Jan. 17, rates declined from Los Angeles to Chicago and Atlanta.
However, the LA-Dallas lane is still showing elevated rates, which could indicate that “carriers still appear to be protecting their capacity for contract shippers in some cases,” Baudendistel said.
“After the removal of intermodal surcharges, domestic rail intermodal may again be a viable option for spot shippers in some westbound lanes from Los Angeles,” Baudendistel said.
UP executives said the railroad expects demand for its intermodal service to persist in 2021, although the pace of that demand may depend on factors such as consumer spending levels amid the ongoing COVID-19 pandemic.
“We’ve had a pretty significant win in the second half of the year [for international intermodal]. We’re expecting that to continue to ramp on,” Rocker said. As the supply chain settles, UP also expects to see more international containers move on dock for rail service versus being bound for transloading, he said.
Also, if U.S. trade policy opens up and consumer spending “gets better, we would expect that volume would increase,” he said.