In Tuesday’s episode of FreightWaves’ Loaded and Rolling show, Christopher Thornycroft, executive vice president at Redwood, joined us to talk about the Lunar New Year and what it means for freight demand. For those unaware, the Chinese Lunar New Year holiday began Jan. 22 and typically lasts two weeks. This year, it will end with the Lantern Festival on Sunday. This holiday, which involves fireworks and gift giving, can cause supply chain disruption in the weeks before and after the celebration as millions of Chinese citizens travel from cities into the countryside to be with friends, family and relatives.
The holiday can cause a lull in factory and shipping activity, and we get Thornycroft’s insights on how this impacts our domestic supply chain. Additionally, he gives his outlook on rates and freight volumes as 2023 begins the Year of the Rabbit at a tortoise pace. Will the Year of the Rabbit live up to its namesake? You can view the entire episode here to find out.
I don’t normally talk about corrugated boxes, but like a cardboard canary in a coal mine, some industries that are close to freight can provide a window into where it is heading. On Monday FreightWaves’ Rachel Premack wrote that demand and output for cardboard boxes and packaging material fell sharply in Q4 2022.
Regarding the extent of the decline, Premack wrote: “U.S. box operating rates fell to 80.9%, the Fibre Box Association said, which was also a low last seen in the first quarter of 2009. This means nearly 20% of the U.S. capacity to produce boxes was stagnant last quarter. Supply of containerboard, which is used to make corrugated boxes, stood at 4.3 weeks, according to the American Forest & Paper Association. That’s down from last quarter, but still historically high.”
Lower consumer demand equals lower need for the boxes that contain the lifeblood of e-commerce. Lower boxes lead to fewer truckload orders, creating a situation in which smaller corrugated shipping companies, often a source of valuable contract freight for smaller carriers, run dry.
Do not fret. While the tide of boxes is waning, some argue this is a return to pre-pandemic norms in which consumer behavior returns to manageable expectations. For those carriers that grew fleets with overpriced equipment in the last two years, this news does not have a silver lining. I would try to ship better news in a cardboard box if I could but alas, this digital medium is less tangible.
On Wednesday, U.S. Bank released its fourth-quarter Freight Payment Index data indicating continuing softening in the trucking market. The report notes that in spite of lowering freight volumes, the total spend on truck freight services didn’t fall as rapidly in the fourth quarter.
Regarding reasons for the market softness, familiar themes such as increased inflation, household spending on services over goods and rising interest rates returned to center stage.
The index itself contracted 4.6% in the fourth quarter of 2022 from 118.5 index points to 113. This decline continued a string of decreases in four of the past five quarters. For the year, the index declined 7.1%.
Notably, not all regions of the country were equally affected by the declines in freight volumes. The report said, “On a year-over-year basis, only the Southwest region posted higher freight volumes than the final quarter of 2021. Of the other four regions seeing yearly declines, the Midwest (6.6%) saw the smallest, while the Northeast (11.1%) saw the largest decrease from the final quarter of 2021.” The Western region saw a year-over-year decline of 8.9% compared to Q4 2021.
The consumer shift from goods back to services cannot be overstated. The report adds, “Macro-economic factors, and a continued shift away from goods procurement to services in Q4, led to a continued decline in shipments to the lowest levels since Q1 2014.”
Summary: Outbound tender rejection levels, a measurement of the percentage of rejected loads electronically tendered to carriers, are at 3.75% — a level not seen since the early days of the pandemic, when rejection rates bottomed out at 2.64% between April and May of 2020. Looking at the chart above, rejection rates for the beginning of 2023 (located in blue at the bottom right of the chart) are at four-year lows, due in large part to a persistent glut of trucking capacity that entered the market to take advantage of record freight volumes that began during the pandemic-related goods surge of mid-2020 (highlighted in orange on the chart).
The freight market is typically characterized by changes in truckload supply and demand, but the current lingering impacts of extra truckload capacity in the market make predictions regarding rate movement challenging.
Even if a significant number of smaller carriers and owner-operators exit the market, it may still take months before carriers can attempt to regain pricing power from shippers that are battered by low consumer demand and inflationary pressures driving up costs. For shippers, when costs increase, transportation budgets are often the first line item in the cost-cutting crosshairs, and attempting to justify further increases for 2023 would prove difficult if market conditions change.
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