Commentary
A few weeks ago, we highlighted the market pressures that were creating the “Mother of Capacity Shortages”. We nailed it. In fact, looking at the spot rate data and the aggregation of data of demand volume, our headline might have been a bit of an understatement. Carriers have started to report seeing little friction in getting rate increases from shippers, suggesting that market sentiment is changing. And the impact will be huge.
Over the past week, we have been studying demand data from across the marketplace. Using over 150 different technical indicators of demand data and rate information, plus talking to a number of executives across the trucking landscape, we are certain that contract rate increases will be sustainable and much larger than most expect. And the intracycle rate increases have started.
Truckstop.com said this was the highest number of load postings in its company’s history. DAT also reported record activity on its load board, suggesting the capacity in the market has been tapped and shippers were resorting to brokers to find capacity in the super-volatile spot market. This is a function of excess demand in the market related to a strengthening economy, a strained labor market that keeps capacity from coming back, and a seasonal peak season shipping cycle (and yes two monsterous hurricanes).
In fact, one CEO of a large asset van carrier that focuses in the expedited team market said, “This is different than any market I have ever seen before. I have been around this business for over 40 years and I have never seen an environment like this. I have heard people compare it to 2004, but that wouldn’t do justice to what we are seeing.”
Telling, considering that some lanes in the contract market saw as much as 6% rate increases back in 2004, making it one of the greatest rate accelerators in the market history. Granted, the economy was on fire (the Bush tax cuts had cycled through the economy in 2003) and new hours-of-service rules that were implemented then exacerbated this. Seeing 30-50% jumps in the spot-market were not unheard of. Plus, 2003-2005 seemed like a hurricane factory, with storms like the Florida Four, Jeanne, Isabel, and Katrina. All of this had a tremendous impact to the supply-demand equation.
According to one source we spoke with, a super large intermodal player sent out a letter to top shippers on Friday informing of an imminent lane-by-lane rate increase that would take effect almost immediately. This is a significant development and suggests that not only does one of the largest intermodal carriers believe they can get rate increases, they are willing to do so intracycle.
Other carriers mentioned that shippers were complaining about service, but then asking for more capacity in the same conversation. Many of those additional loads came with rate increases. Even shippers with the largest purchased transportation budgets were almost begging for capacity and willing to take very aggressive rate increases, even if it were on their contract business.
One of the largest shippers in the US, spending nearly $5B freight transportation mentioned double-digit increases were expected in their budget, suggesting that +10% contract rate increases would not be shocking.
The larger carriers are not waiting to have out-of-cycle rate increase conversations. In fact, when shippers scream about service failures, the savviest carriers are using this as an opportunity to get rate increases, reminding shippers that their days of setting the market are over with. For months we heard that contract rates in 2018 would increase by 2-4%. In the past few weeks, our estimates are closer to 9%, plus or minus 2.5% percent (6.5% to 11.5%) in terms of year-over-year increases in contract rates. This is unusually high, but this is an unusual market where carriers have gained instant control over pricing in the market and shippers have little capacity elasticity.
Wall Street is also taking notice. The truckload carrier stocks have been on a run lately, suggesting that the big-money traders also see the same trends (Wall Street is usually ahead of the game in understanding the freight markets vs. the folks in the physical market). When the truckload providers report in a few weeks, we won’t be surprised to see the carrier CEOs report very bullish outlooks into next year.
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