Shippers take pricing power as softening conditions continue

This week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)                                

Last week’s FreightWaves Supply Chain Pricing Power Index: 55 (Carriers)

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.

As first-quarter earnings continue to roll in and transportation companies are reporting solid revenue figures, it is important to remember that throughout most of the first quarter, the market favored transportation companies as rates — specifically contract rates — set new highs, volume levels remained at levels experienced throughout 2021 for two-thirds of the quarter and capacity was still difficult to secure under contracted rates. Those dynamics started to change in early to mid-March, which wasn’t early enough to slow the quarter down for many transportation companies. 

The pressure starts to mount in the second quarter and into the back half of the year as consumer spending habits shift from goods back to services and rates adjust to changing market conditions. So while company earnings indicate what happened in the past, the forward-looking data indicates that market dynamics are changing to favor the shipper, after favoring the carrier for the past 94 weeks.

The Pricing Power Index is based on the following indicators:

Accepted volumes nearly 5% below 2021 levels

Easter weekend could be causing tender volumes to be lower than they appear, but one thing is for certain — there has been no slowdown in the decline of the Outbound Tender Volume Index (OTVI). April is traditionally softer than March, as shippers tend to increase tender volume levels right before the end of the first quarter. The increase to close the Q1 didn’t occur, but April tender volumes remain light compared to March.

OTVI declined by nearly 5% over the past week, but a significant portion of the drop occurred on Friday of last week, leading into the holiday weekend. Removing that drop, tender volumes have continued their decline over the week, dropping 2.3% since Friday. OTVI is down 22.25% year-over-year (y/y), but the comps are quite difficult because OTVI as a metric includes both accepted and rejected tenders, thus when rejection rates are tremendously high like they were throughout 2021, OTVI is artificially propped up.

Adjusting OTVI by the rejection rate allows for a clearer picture of true freight volumes moving throughout the country. Accepted tender volumes have turned negative within the past two weeks, indicating that the softening of freight volumes is happening but not as rapid as the decline in OTVI. Accepted tender volumes currently sit about 5% below year-ago levels. Just in the past month, accepted tender volumes have declined by more than 7%, again not as fast as OTVI but concerning nonetheless as we enter what is typically one of the stronger periods for freight.

There has been a lot of talk over the past several weeks about the softening of the freight market, especially with the rates of change in spot rates, rejection rates and OTVI. The important thing to note is that OTVI tracks the contracted freight market closely, though there are some spot loads included in the index. The softness in the freight market is stemming from the spot market, which leads the contract market in directional moves. So while the spot market has shown signs of softening, the contract market had been holding up relatively well.

The freight market is set for volatility over the next few months as consumer spending slows and lockdowns in China allow for the U.S. ports to catch their breath. The lockdown in Shanghai, of which no one knows the length of time, could place immense strain on supply chains, leading to tremendous backlogs at the ports once again.

Whenever China does turn back on, it may not be an instantaneous release valve, as numerous ships currently off the coast of Shanghai contain vital raw materials used in the manufacturing of goods. 

Once those goods leave China and are stateside the challenges for freight demand start to intensify. Prologis, one of the leading warehousing companies, released the company’s first-quarter earnings earlier this week, reporting that 98.3% of the company’s available U.S. square footage was leased and 97.6% was currently occupied. There were four markets where 100% of the available square footage was leased: Central Valley, California, Las Vegas, Phoenix and Nashville, which combine to total 9.5% of the company’s U.S. footprint.

Slower consumer spending combined with record inventory levels is leading to shippers to shift modes of transportation, opting for the rails. The time-sensitive nature that most shippers faced to get goods to market over the past year is dwindling, causing the shift. Shippers tend to use the far cheaper intermodal option when time isn’t of the essence, in an effort to not only save money but also limit inventory within warehouses, using containers effectively as moving warehouses. This shift has started as loaded domestic intermodal container volumes actually held up throughout March and early April, while OTVI has been falling. This signals that intermodal marketing companies (IMCs) are in a position to take advantage of a softening truckload market in the coming months.

Of the 135 total markets, however, only 37 reported weekly increases, down from last week’s 55 that reported increases. 

The largest markets in the country experienced tender volume levels decline over the past week with the exception of Ontario, California, which has been able to piece together consecutive w/w volume gains. In Ontario, tender volume levels increased by 3.68% w/w, which allowed the market to reclaim its place as the largest freight market in the country.

Across the rest of the country, markets like Atlanta, Dallas, Chicago and Harrisburg, Pennsylvania, all posted a soft week for freight demand. In Atlanta, freight volumes pulled back by 3.48% w/w, the smallest decline of the four markets. The biggest decline came from the Chicago market where tender volume levels fell by nearly 12% in the past week. Both Harrisburg and Dallas experienced a 5% decline in tender volumes. 

By mode: For the first time in several weeks, dry van volumes have underperformed reefer volumes over the past week. As was the case with the overall volume index, both the Van Outbound Tender Volume Index (VOTVI) and the Reefer Outbound Tender Volume Index (ROTVI) were down on the week, falling 5.5% and 4.4% w/w, respectively. As produce season rapidly approaches, reefer tender volumes may see an uptick from reduced capacity numbers, which will in turn cause rejection rates to level off from the rapid decline, but that hasn’t appeared to have happened yet.

Carrier compliance improves, but threatens small carriers with spot market exposure

The downward decline in tender rejection rates over the past six weeks is both the largest and fastest decline in tender rejection rates in over 2 years, with only the decline at the onset of COVID-19 being more severe.

Over the past week, OTRI, which measures relative capacity in the market, has started to stall out, falling just 64 basis points (bps) w/w, to 10.43%. The national rejection rate is nearly 1,500 bps below year-ago levels. Heading into the weekend, typically rejection rates flatten out slightly, so expect that rejection rates could break through the 10% some time within the next week.

There have been numerous earnings releases this week from major players in the domestic transportation market including Knight-Swift and J.B. Hunt. On earnings calls with analysts, both were asked about the recent trends in the spot market and what it means for their businesses. Both mentioned that the current conditions are more isolated to smaller capacity providers.

In a 2021 analysis, FreightWaves concluded that the growth on the capacity front has been primarily driven by small fleets of between 1 to 20 tractors. Owner-operator fleets totaled 56.9% of total for-hire fleets in the market at the time but provided just 8.4% of total tractors. 

These small fleets lack the density to create meaningful capacity to create networks around large shippers. That leads to the smaller carriers relying heavily on load board volumes and as rejection rates collapse, there is less spot market activity, leading to spot rates accelerating their downward decline.

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, there is only a single blue market, Cape Girardeau, Missouri, which should receive primary attention.

Of the 135 markets, only 45 reported higher rejection rates over the past week as carriers compete for loads amid quieter freight demand.

The East Coast port markets are seeing capacity flood into the markets ranging from Jacksonville, Florida, all the way up to Boston. Savannah, Georgia, which houses the third largest port complex in the country, experienced tender rejection rates fall by 355 bps over the past week, falling to 4.45%, nearly 1,000 bps below the Q1 average. In Elizabeth, New Jersey, home of the second largest port complex, rejection rates fell 201 bps w/w, to 6.63%, about 900 bps below the Q1 average.

By mode: After taking a slight breather to start the month, the flatbed market has started to heat up once again. Over the past week, the Flatbed Outbound Tender Reject Index (FOTRI) increased by 300 bps in the past week, sending the overall rejection rate back above 30%, currently at 32.37%.  FOTRI is 787 bps higher than 2021 levels, as the flatbed market was the last mode to hit its stride, piggy-backing off of the restart of the industrial economy.

Rejection rates across the other two modes, reefer and van, continue their rapid descent that started six weeks ago. The Van Outbound Tender Reject Index (VOTRI) fell another 61 bps this week, dipping below the 10% mark. VOTRI is down 1,600 bps from year-ago levels and down 875 bps since March 1. 

The decline on the reefer side of the market was more severe as the Reefer Outbound Tender Reject Index (ROTRI) fell by 218 bps w/w. ROTRI has been cut by more than half since the beginning of the year when ROTRI hovered around the 40% mark, now down all the way to 16.22%. ROTRI is currently sitting at a resounding 2,800 bps below year-ago levels.

Spot rate decline accelerates this week as contract rates have yet to cool

The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week’s data.

Truckstop.com’s national dry van spot rate is resembling more of Busch Gardens’ SheiKra roller coaster with the steady incline over the past year before a nearly 90 degree drop in the past couple of weeks. Over the past week, Truckstop.com’s national all-in dry van spot rate based on 100 lanes from Truckstop.com’s load board fell another 14 cents per mile, to $3.02 per mile, accelerating from last week’s 13 cents per mile decline. Since peaking the week of Jan. 9 at $3.83/mi, Truckstop.com’s national spot rate has been cut by more than 20%, the fastest decline in the dataset. The national average spot rate is currently at the lowest level since February 2021, prior to the freeze that severely disrupted transportation networks, currently sitting six cents per mile lower than this time last year.

Of the 102 lanes from Truckstop.com’s load board, just 13 reported weekly increases, down from last week’s already staggeringly low 17 lanes that reported increases. Westbound lanes out of Texas were among the increases with Houston to Denver leading the way, increasing by 24 cents per mile to $3.23.

The spot market always leads the contract market in terms of rates given the bid cycles that shippers, carriers and brokers all participate in. The severe decline in spot rates and rejection rates haven’t led to contract rates slowing, at least yet anyways. The initially reported van contract rate, which is reported on two-week lag and represents just the base linehaul rate, erased last week’s decline, rising 6 cents per mile to $2.96. 

Contract rates continue to perform admirably compared to the previous year, currently up 20% y/y, a gap that has been maintained for much of the past six months. Contract rates are slower to react to market conditions, but as spot rates cross over contract rates, the rate of growth for contract rates will stall or could turn negative after the dramatic increase in the upcoming months.

There has been limited relief for shippers on backhaul lanes, especially those headed into Los Angeles, though there has been relief on the outbound moves from Southern California in recent weeks.

The FreightWaves Trusted Rate Assessment Consortium (TRAC) spot rate from Denver to Los Angeles tells quite the opposite story of normal freight markets. The FreightWave TRAC spot rate shows there was a slight breather on the Denver to Los Angeles lane, falling by 11 cents per mile in the past week  but is still 57 cents higher than it was at the beginning of March. Early in the week there was an uptick in volumes in Southern California that likely aided in rates coming down as carriers’ confidence to get reloaded increased.

Heading eastbound continues to be carriers’ preference even as the rate from Denver to Dallas continues to fall from the highs set in January. Over the past week, the FreightWaves TRAC spot rate fell 15 cents per mile to $1.57, the lowest the rate has been since early October. Since March 1, the rate is down 29 cents per mile, indicating carriers are more willing to take lower rates eastbound to ensure assets are being utilized. 

The Los Angeles to Dallas lane, one of the densest lanes in transportation, continues to creep lower. The FreightWaves TRAC spot rate along this lane has fallen another 8 cents per mile this week, to $2.78. Since the beginning of the year, the rate along this lane has fallen by 31% from north of $4 per mile to well under $3/mi, with no signs of upward movement. 

Ultimately, the slope that rates are currently on hasn’t shown signs of slowing down in the data, especially as rejection rates move rapidly toward 10%. As rejection rates continue to slide and tender volumes follow suit, look for spot rates to continue down the ski slope started in mid-February.

For more information on the FreightWaves Passport, please contact Kevin Hill at khill@freightwaves.com or Tony Mulvey at tmulvey@freightwaves.com.

Source: freightwaves - Shippers take pricing power as softening conditions continue
Editor: Tony Mulvey