Shippers claw back some pricing power but rates are still elevated

The Pricing Power Index is based on the following indicators:

Load volumes stable but volume growth is coming

The Outbound Tender Volume Index (OTVI), shippers’ requests for capacity, has stabilized over the past week, breaking the downward trend that started at the beginning of October. Over the past week, OTVI has fallen by less than one-tenth of a percent.

Volume levels had been maintaining strength over 2020 levels, outside of when Hurricane Ida disrupted supply chains during the first week in September. Volumes have inflected negative year-over-year (y/y) for the first time, outside of that period, since May 20. Tender volumes now sit 0.12% below 2020 levels, so while overall it is insignificant, the timing is intriguing.

October is traditionally a softer month for freight volumes, being sandwiched between the end of the third quarter and peak retail season that kicks off on Black Friday. Freight volumes in 2020 started to accelerate in the middle of October, while in 2021, the acceleration has yet to come to fruition, moving sideways for the better part of 10 days now. The trend is closer to what was experienced in 2019, albeit at a much higher level (+56%).

In both 2019 and 2020, tender volumes peaked on Black Friday before deteriorating throughout December as retailers had goods in place for the holiday shopping season. In 2021, expect that freight volumes hold up stronger in December given the constraints across domestic transportation networks.  

Though freight volumes are still stuck in a seasonal lull, the elevated import levels over the past several months will bear fruit, driving volumes higher in November. 

Adjusting OTVI, which includes both accepted and rejected tenders, by the tender rejection rates shows the true level of freight moving through networks. Accepted tender volumes are running up nearly 1% week-over-week (w/w), maintaining strength compared to last year, running up nearly 7% y/y. A lot of the strength in accepted tender volumes is being driven by the decline in rejection rates over the past three months.

Across the country, volume levels in 66 of the 135 markets tracked by FreightWaves SONAR were higher over the past week. Freight volumes in Southern California have had one of the softest weeks of all the freight markets. The two large markets, Ontario and Los Angeles, both experienced volume levels fall by over 8% in the past week, the largest single-week drop in freight volumes since the Labor Day holiday week. While OTVI skews toward the contract market, spot volumes out of Los Angeles continue to shine, increasing in five of the eight outbound lanes over the past week.

A market that has been plagued by intermodal congestion this year and had been underperforming recently was Chicago. That all changed over the past week as tender volumes increased by nearly 19%, the fifth-largest increase over the past week. Tender volumes are now up more than 17% higher than 2020 levels, the widest the gap has been since late July.

A market that has overperformed recently, Elizabeth, New Jersey, took a breather over the past week. Tender volumes in the market fell by 6.61% w/w, but even with the recent pullback, tender volumes are maintaining the slimmest of margins over 2020 levels.

By mode: Reefer tender volumes, as represented by the Reefer Outbound Tender Volume Index (ROTVI), continued to fall over the past week. ROTVI pulled back by 3.56% w/w, the largest weekly decline in nearly a month. This was the second-consecutive week that reefer tender volumes were negative on a w/w basis, the first time since early May. Reefer tender volumes continue the underperformance compared to 2020, now nearly 12% lower y/y. The holidays, as well as severe winter weather, will put pressure on temperature-controlled demand in the following six months. Even with the increased pressure, reefer tender volumes may still underperform y/y given how elevated reefer volumes and rejection rates were in 2020.

Conversely, dry van volumes really picked up steam this week, rising 0.7% w/w. Dry van volumes are closer to 2020 levels than the reefer market, running down just 1% y/y. The recent uptick in dry van volumes is a positive for the overall freight market heading into the peak season. 

Rejection rates restart the downward trend

The Outbound Tender Reject Index (OTRI), a measure of relative capacity in the market, picked up where it left off, trending downward heading into peak season. Over the past week, OTRI fell by 60 basis points (bps) to 20.23%.

The decline in rejection rates in October is common as rejection rates are typically the highest at the beginning of the month and end the month lower. So the drawdown in rejection rates isn’t a surprise and will likely reverse course surrounding the holidays as drivers stay closer to home. 

The recent drawdown does bring the overall rejection rate to the lowest it has been since August 2020. Rejection rates continue to run well below year-ago levels, currently 414 bps lower y/y. Shippers have been able to drive improved carrier compliance through higher contract rates.

Additional constraints have effectively kept a lid on capacity over the past year. New truck orders have surged, running well above full-year 2020 orders. Production has struggled to keep up with the orders as the semiconductor shortage has halted production lines at OEMs for various times throughout the year. OEMs continue to work through the supply chain constraints, but backlogs have grown so long that production for recent new orders is being pushed well into 2022.

Though the national rejection rate was lower, the number of markets that tightened compared to the number that loosened over the past week was relatively balanced. Out of the 135 markets within SONAR, 64 markets experienced increases in rejection rates w/w.

While Chicago experienced an explosion in freight volume, rejection rates in the market continue the slide. Over the past week, the rejection rate in Chicago fell by 146 bps to 19.36%. Outbound rejection rates have been volatile in the market, but with the recent pullback, relative capacity in the market is looser than it was in 2020. The rejection rate is currently 166 bps lower y/y. Additionally, carriers are more willing to enter the market as the Inbound Tender Reject Index (ITRI), which measures carriers’ willingness to enter a market, fell by 60 bps to 22.08%, the lowest level in 2021.

Relative capacity is also loosening in Southern California. Rejection rates in both Ontario and Los Angeles fell by 185 bps over the past week. The rejection rate in Ontario and LA is now down to 15.76%, 664 bps below 2020 levels.

By mode: Reefer rejection rates hit the restart button over the past week. The Reefer Outbound Tender Reject Index (ROTRI) decreased by 116 bps over the past week to 36.35%, erasing all of last week’s increase. Reefer rejection rates are now over 700 bps lower than they were a year ago.

Dry van rejection rates pulled back by more than the overall rejection index. Over the past week, van rejection rates fell by 74 bps to 20.33%. The largest equipment type in SONAR has been the most stable for the past year but has dipped below 20% for the first time since February. However, as intermodal peak season passes and truckload demand increases, expect that pressure on the dry van market will force rejection rates higher, even though contract rates have increased by over 25% y/y.

The flatbed market has continued to tighten over the past week. The flatbed market lagged behind the other two equipment types but came alive at the end of the first quarter. Over the past week, flatbed rejection rates increased by 239 bps to 266.55%. Since flatbed lagged behind the other two equipment types, flatbed rejection rates are more than 1,500 bps higher than year-ago levels.

Ultimately, capacity is going to be difficult to secure throughout the final quarter, even though rejections are below 2020 levels. Add in that the September jobs report had the first decline in truck transportation employment numbers since January. The risk of capacity flooding the market seems relatively small, especially in the short term. The barriers of entry have become increasingly difficult with the rapid rise in used equipment prices, so shippers expecting conditions to ease significantly over the next three months are in for a tough reality on the capacity front.

Rates hit the brakes in the middle of October 

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

Spot rates have suffered the third consecutive down week as rejection rates continued the downward slide. Truckstop.com’s national spot rate, which includes fuel surcharge and other accessorials, fell by 2 cents per mile over the past week to $3.43/mi. The national spot rate is now nearly 5% off the all-time high set the week of Sept. 5. 

Of the 102 lanes from Truckstop.com’s load board, 45 reported increases last week, with outbound Los Angeles continuing to climb. Of the eight lanes out of Los Angeles, seven were higher in the past week, with the exception of the LA-to-Las Vegas lane, which fell by 6 cents per mile to $5.15/mi. 

The uptick in rates out of LAX comes as rejection rates and volume levels have pulled back, signaling shippers may just be avoiding the contract market to move freight as soon as possible as opposed to having to go through the entire routing guide. 

Even with the recent drawdown,  the national spot rates continue to run nearly 20% higher y/y. Pressure will intensify for spot rates over the next couple of weeks as peak season kicks off.

Contract rates also pulled back over the past week, decreasing by 2 cents per mile to $2.69. Dry van contract rates, which are reported on a two-week lag, are roughly 3% off the all-time high set in mid-September. 

Contract rates, which are just the base linehaul rate excluding fuel surcharges and other accessorials that are included in spot rates, have closed the gap with spot rates significantly over the past year. Contract rates continue to run up over 20% y/y and likely face more upward pressure heading into 2022.

Ultimately, upward pressure on freight rates is likely to remain in place for at least the next six months and beyond as supply chain constraints continue to be worked through.

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com or Andrew Cox at acox@freightwaves.com.

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