Loaded and Rolling: Inventory levels impact truckload contracted rates

LMI transportation prices see fastest decline in 6 years

Thomas Wasson

2 years ago

Inventory levels impact truckload contracted rates

Persistently higher inventory levels are causing a drag on truckload tender volumes as 2023 begins. 2019 and 2018 SONAR data indicates we may approach levels of pre-pandemic seasonality, but higher truckload capacity will continue to negatively impact rates until enough truckload supply leaves the market.

Anecdotally, Wolfe Research noted in a discussion with a large retail shipper that inventory levels remain bloated in total dollar amounts but in a better state than other retailers in terms of total unit count. There is the expectation that destocking efforts in Q1 thru Q2 of this year will remove excess inventory from spring 2022 and improve their inventory trends.

Regarding contracted rates into 2023, the large retail shipper told Wolf Research it originally expected contracted truckload rates to drop 5% but now believes rates will decline into the low double digits. Rates with freight brokers were expected to fall closer to 25% to 30%.

These rate concessions are expected to put greater pressure on trucking margins moving into the second half of 2023. A private truckload carrier told Wolfe Research average contracted rates are down 3% to 4% from their highs in March, with the expectation of a bottoming out around 7% year over year by spring. However, high-volume lanes netted a double-digit percentage concession. The carrier expects margins to deteriorate by about 400 basis points by next year as equipment costs and wages remain sticky, but insurance costs could lower.

LMI transportation prices see fastest decline in 6 years

The Logistics Managers’ Index (LMI) on Tuesday released data showing a reading of 36.9 for transportation prices for December 2022. For context, any reading above 50 indicates expansion while a reading below 50 shows contraction. FreightWaves’ Todd Maiden writes that the steep downward decline in March 2022 for the transportation prices index “was the fastest recorded in the six-year history of the data set.”

Transportation prices are often impacted by truckload supply and demand dynamics, and inventory levels are a hot topic. The LMI report noted: “Inventory Level growth was up slightly from November (+2.4), but its reading of 57.3 is still down significantly from the rates of growth in the 80’s and 70’s we observed earlier in the year. Despite the sizable reductions in inventories, it does not appear that many retailers are aggressively pursuing a sizable restocking of goods.”

For trucking, this bodes poorly as truckload capacity remains high due to the previous two years of record demand. The report adds: “With warehouses largely full of product before the start of the holiday season, less transportation than usual was needed to push goods forward at the last minute. Transportation Capacity continues to grow quickly (-1.9) at a rate of 69.5 — just short of significant expansion — in December. This is still a significant rate of growth but 69.5 does mark a second consecutive month of slowing expansion.”

Market update: DOE/EIA diesel price up 1st time in 7 weeks

The Department of Energy/Energy Information Administration (DOE/EIA) average retail diesel price broke its seven-week streak of declines and rose 4.6 cents per gallon. This comes as higher futures prices on the CME commodity exchange for ultra low sulfur diesel caused prices to rise.

Additionally, currency movements are impacting oil prices. FreightWaves’ John Kingston writes: “Broader oil markets were hit Tuesday with a higher dollar, as there is an inverse relationship between oil prices and the strength of the greenback. A stronger dollar will work to push down prices. But a generally bearish forecast on the state of the world economy in 2023 also led to benchmark Brent crude dropping more than 4.4% and U.S. benchmark WTI declining 4.15%.”

Another factor to watch regarding prices is the weather. Kingston notes that diesel is a distillate, as is heating oil, and changes in the weather can cause greater diesel demand if the supply of heating oils can’t keep up. Currently the forecasts for above-average temperatures may help lower costs in the short term.

FreightWaves SONAR spotlight: Outbound tender lead times still elevated into new year

Summary: Outbound tender lead times remain elevated following New Year’s at 3.225 days compared to 2.86 days recorded on Nov. 3, an increase of 12.76% month over month. During that same period, outbound tender rejection rates increased 148 basis points from 4.09% to 5.57%.

The Outbound Tender Lead Times index (OTLT) measures the length of time in days between a load being offered and the requested pickup date. For example, if a customer tenders a load to a carrier on Jan. 1 but the load is scheduled for pickup on Jan. 4, this will show the load’s OTLT as three days.

The surge in lead times and rejection rates can be attributed to truckload capacity leaving the market for the holiday weekends as well as customers attempting to get end-of-month, end-of-quarter shipments sent prior to the new year. As drivers and owner-operators return to work, expect rejection rates and lead times to continue downward barring any significant event — such as a blizzard — that would take truckload capacity out of a given market.