Southern California strength places pricing power with carriers

The Pricing Power Index is based on the following indicators:

Load volumes stabilizing ahead of traditional peak

The Outbound Tender Volume Index (OTVI), shippers’ requests for capacity, has started to stabilize, signaling that the short-term trough may be ending. OTVI reached the lowest level since Aug. 5, with the exception of the Labor Day holiday, over the weekend. Load volumes have since rebounded slightly, increasing by roughly half a percent to start the week.

OTVI is following a seasonal pattern so far in the fourth quarter, with volume levels falling during October and ramping up in November ahead of the holiday retail season. The gap between year-ago volume levels is the narrowest it has been all year, outside of the Labor Day holiday week when volumes briefly turned negative, currently sitting at just 1.28%. 

Congestion on the railroads will continue to drive volumes into the truckload market, both contract and spot, especially as the traditional peak season for intermodal passes. Additionally, the railroads are essentially pricing themselves out of excess freight, especially along one of the densest intermodal lanes in the country, Los Angeles to Dallas. This is driving shippers into the truckload spot market as spot volumes from Los Angeles to Dallas continue to climb, rising another 5% over the past week, according to Truckstop.com’s load board. 

OTVI, while based on shippers’ requests for capacity, includes both accepted and rejected tenders, so when tender rejection rates are elevated, OTVI tends to climb as well. Adjusting OTVI by the tender rejection rate aids in painting a picture of accepted freight volumes moving through networks. Accepted tender volume levels have started to recover over the past couple of days, but are still down 1.27% week-over-week (w/w). Accepted tender volumes are outperforming last year’s level by 6.5%, but most of that outperformance is being driven by improved rejection rates.

Across the country, 71 of the 135 markets tracked by FreightWaves SONAR were lower over the past week. The smallest market in the country, Green River, Wyoming, experienced the largest increase in freight volumes over the past week as a snowstorm swept across the area. Overall,  the increase in volume levels in the market is a mere blip on the radar but shows how winter weather can affect freight markets in the upcoming months.

The largest port markets in the country continue to see volume levels rise while the interior markets are seeing volumes slow, signaling that shippers are starting to move goods into position for the holiday retail season. 

Volume levels in the large Southern California market, Los Angeles and Ontario, experienced volume levels increase by 5.86% and 3.83% w/w, respectively. The markets are responsible for over 7.5% of all outbound freight in the country, so the increase in outbound volume is a positive as a whole, especially for the interior markets in the coming two months. 

With the congestion in San Pedro Bay, alternate ports of entry were sought by container ship lines to get unloaded and capacity back to Asia as soon as possible. The Port of New York and New Jersey was one of the benefactors on the East Coast. Elizabeth, New Jersey, which houses the Port of New York/New Jersey, experienced volume levels increase by 8.37% w/w.

By mode: Reefer tender volumes, as represented by the Reefer Outbound Tender Volume Index (ROTVI), have recovered over the past couple of days but are still down overall during the past week. Reefer volume levels continue to underperform last year, currently sitting over 8.5% below 2020 levels.

Dry van volumes are performing better than reefer volumes, falling less than half a percent over the past week. Van volumes are still hovering just below last year’s levels and will likely outperform in the coming weeks due to the influx of freight that has to move through the network ahead of the holidays.

The overall outlook for freight volumes in the final quarter of 2021 is strong, likely to lead to a continued melt-up in freight rates moving through the rest of the year. It is worth noting that Blackhawk Network, a global branded payments provider, conducted a survey that found 83% of respondents want to give gift cards instead of physical gifts. Shipping delays and stockouts were the leading reasons for consumers opting for gift cards over physical gifts. This rise in gift cards, especially in the dining sector, could have negative implications for freight volumes in the final quarter.

Rejection rates find some solid footing

The Outbound Tender Reject Index (OTRI), a measure of relative capacity in the market, has been trending sideways for the better part of a week now. Over the past week, OTRI fell by just 6 basis points (bps) to 20.89%.

Rejection rates traditionally start October higher than where they end the month, but the ramp in rejection rates this year may begin slightly before the traditional peak. Retailers have started announcing Black Friday deals earlier, which is going to put pressure on transportation networks earlier than normal.

The October pullback in rejection rates is muted compared to last year, when rejection rates fell by nearly 150 bps. So far in October, rejection rates have pulled back by 80 bps but are still nearly 400 bps below 2020 levels. Higher contract rates have allowed for carrier compliance to improve, but as volume levels intensify and shippers have to move goods to make the holiday deadlines, rejection rates will likely increase, putting upward pressure on rates.

As the overall Outbound Tender Reject Index was down just 6 bps w/w, the number of markets that tightened and the number that loosened over the past week was balanced. Of the 135 markets within SONAR, 67 experienced relative capacity tighten.

The map above shows the Weighted Rejection Index (WRI), which is the product of the Outbound Tender Reject Index — Weekly Change and the Outbound Tender Market Share. The WRI prioritizes the size of the market with the changes in rejection rates, meaning that dramatic changes in rejection rates in markets with limited outbound volume aren’t as necessarily as impactful as smaller changes in large markets. The darker blue the market signals markets to focus on first and price higher because capacity will be difficult to secure. Conversely the darker red a market is the easier it would be to secure capacity in.

Looking at the map above, Ontario, the largest market in the country, is tightening relatively quickly for a market of its size, aiding in driving rates out of Southern California markets higher. Over the past week, rejection rates increased by 130 bps in the market, bringing the rejection rate to 17.62%. The market has seen an increase in volume, which will allow carriers to be more selective with freight, charging higher rates to leave the market. 

Given Southern California’s importance to domestic transportation networks, the tightening of relative capacity in the market will have ripple effects in other markets as carriers head west for higher freight rates.

By mode: Both reefer and dry van rejection rates were relatively stable over the past week, especially compared to flatbed rejection rates. Reefer rejection rates fell just 16 bps over the past week, but reefer capacity continues to be the hardest to secure of the three equipment types within SONAR. As colder weather months approach, reefer demand will increase, spurring reefer rejections higher than they currently are, especially when shipments of turkeys and ham start to pick up ahead of the holidays.

Dry van rejection rates fell just 10 bps over the past week. The largest equipment type in SONAR has been the most stable for the past year. 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 been the most volatile for the past month. The flatbed market lagged behind the other two equipment types but came alive at the end of the first quarter. Since April, flatbed rejection rates have been around 25%, outside of a spike around Memorial Day and last week.

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.

Freight rates follow volume and rejection trend in most recent week

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

Truckstop.com’s national spot rate, which includes fuel surcharge and other accessorials, fell by another 3 cents per mile over the past week to $3.45/mi. The pullback in spot rates was the equivalent to last week’s increase. Of the 102 lanes from Truckstop.com’s load board, 41 reported increases last week, with outbound Los Angeles increasing again. 

The LA-to-Dallas lane, which is the largest of the lanes out of Los Angeles, set a new all-time high this week, climbing 3 cents per mile to $3.65/mi. Only the LA-to-Phoenix and LA-to-Seattle lanes were lower this week. 

The national spot rate finally joined both tender volumes and rejection rates, pulling back last week. The national spot rate is still well above last year’s level, running up 19% y/y.

Dry van contract rates did reverse in the most recent week, increasing by 1 cent per mile to $2.71. Dry van contract rates, which are reported on a two-week lag, are off the all-time high set in mid-September. Expect that contract rates will see a slight upward move in the next week, following the move spot rates experienced two weeks ago.

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 24% 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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