State of Freight takeaways: Low rates, low OTRI mask market improvement

Mixing up the difference between a freight market suffering from low rates and rejection rates and one in which volume is relatively robust remains a feature of the current shipping environment.

That is one of the takeaways from the September edition of FreightWaves’ State of Freight webinar, on which Director of Freight Market Intelligence Zach Strickland interviewed FreightWaves CEO Craig Fuller.

Here are some of the key themes of the webinar.

The volume-capacity imbalance is skewing perceptions

Fuller, citing data from FreightWaves SONAR, said, “We’re seeing current volume at higher levels than we’ve seen almost anytime this year, and it’s continuing to accelerate throughout the year.” But when he does his “channel checks” or hears “anecdotal statements,” Fuller said freight market participants often conclude that conditions are weak.

But “what they’re talking about is the overcapacity, the overabundance of the number of trucks,” Fuller said. Data on volume is “actually fairly robust,” he said, showing a chart from SONAR’s Outbound Tender Volume Index (OTVI). A person looking at the data without taking into account rates “would say this looks like a really strong recovery,” Fuller said, with levels “certainly above where we started the year.”

But “go ask anyone in the market, and they would disagree with you. And the reason they’re not seeing it is because we’ve had this overabundance of capacity in the market, and it still exists.”

Where it all comes together is in the tender rejection data reflected in the Outbound Tender Reject Index, which has lingered usually at less than 5% for several months. 

Digital brokerages are keeping smaller carriers alive

“A lot of small guys were able to hang on when they weren’t able to hang on before because they’ve been able to access freight much easier than they ever were able to do in the past,” Fuller said. And the reason for that is the “proliferation of companies like Uber Freight (NYSE: UBER) and Convoy.” But it isn’t just the digital brokerages; Fuller cited the “massive growth of C.H. Robinson (NASDAQ: CHRW) over the last decade.” Brokerages in general 15 or more years ago just handled “the stuff that nobody wanted.” But with the growth in brokerages, Fuller said he is finding that some brokerages are pushing out trucking companies in shipper routing guides, giving those carriers that have working relationships with brokers a shot at better freight. “Jim Bob Trucking,” a euphemism for a small carrier, “is able to survive a lot longer with just enough cash to stay in the game.”

The gap between contract and spot rates suggests a bottom may have been reached

The spread in SONAR between contract rates and spot rates is near 62 cents per mile, and that gap has been holding steady. “I certainly didn’t think we would see the bottom with contract rates at 62 cents per mile [over spot],” Fuller said. “I thought it would go down.” But given that the spread has held steady for a significant amount of time and that spot rates are at levels not likely to go lower “unless we see an economic collapse, I don’t think we will see a situation where contract rates get much cheaper,” Fuller said.

Intermodal is acting differently than in the past

Rails lost market share in the past because of such issues as service, chassis availability, “things like that,” Fuller said. And with low trucking rates, that’s a tough time for intermodal to recapture customers. But “a lot of intermodal carriers have sort of realized that they have to fight for share and have been responding to that in their bid cycles,” Fuller said. And the result is that the carriers that are doing well “have capacity connected into the railroads.” Additionally, the current market for goods is one where inventory reduction has been the name of the game for many months, and intermodal delivery “does not do well when you have very tight time frames,” Fuller said. But with quick inventory replenishment not a priority, “when time is not high-pressure, that favors intermodal.”

The coming Mexican decade will benefit Texas

China’s longtime dominance of sending manufactured goods to the U.S. is waning to the benefit  of Mexico, and cross-border data from crossings such as Laredo, Texas, bear that out, Fuller said. He noted that Laredo is the strongest-growing market for goods entry into the U.S. “I think that continues to play out, so we will continue to see a massive momentum build in Mexico,” Fuller added. He also noted that Mexico will be electing a new president next year to replace term-limited Andrés Manuel López Obrador. With polls showing a strong performance by Mexico City political leader Claudia Sheinbaum Pardo, Fuller said Mexico may be led by somebody who has “a very forward-thinking economic policy.” “She’s thinking about how do I bring more of the interior part of Mexico online, not just the border,” Fuller said. Given that, “I think there’s a chance for Mexico to rise. It is going to be Mexico’s decade.” And with that will come an enormous spillover of economic activity into Texas, he added. 

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