This week’s DHL Supply Chain Pricing Power Index: 70 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 70 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 70 (Carriers)
The DHL Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.
The Pricing Power Index is based on the following indicators:
Volumes decline sharply due to Thanksgiving
True to form, Thanksgiving impacted the Outbound Tender Volume Index (OTVI) drastically. OTVI, a seven-day moving average of shippers’ requests for capacity, tumbled by over 18% on Thursday, which is pretty normal around holidays. While the pullback in volumes on Thursday looks alarming, tender volumes on Wednesday were the highest they had been in over a month.
The chart above shows that volumes have been trending in a largely seasonal pattern for the better part of three months now. Volumes traditionally fell from Labor Day through early November, before a rapid increase leading into the Thanksgiving holiday and traditional peak retail season (Black Friday). Tender volumes in 2021 have largely followed what occurred in 2020, though the moves in 2020 were more pronounced, which leads to tender levels being down 8% year-over-year (y/y).
Even with the Thanksgiving impact, tender volumes are 23% higher than they were in 2019 when they were still climbing ahead of Thanksgiving. Over the past two years, freight volumes have been driven by the COVID-19 pandemic, but as the economy has reopened, tender volumes remain elevated.
Adjusting OTVI, which includes both accepted and rejected tenders, by the tender rejection rates shows the true level of freight moving through networks. Over the past week, accepted freight volumes have decreased by 13.8%, but on Wednesday, accepted tender volumes were up over 5% w/w. Again the timing of Thanksgiving is impacting y/y comparisons, now down 15.6%, but that will likely turn positive again in a day or two. On Wednesday, accepted tender volumes were 4.3% higher than they were in 2020, signaling that more freight was moving through networks.
Where do volume levels go from here?
Backlogs are still being worked through at the ports, while inventory levels remain at historically low levels. Upticks in ocean bookings in recent weeks will likely keep capacity on the ocean tight, but also impact the backlogs at the ports as well ahead of the Lunar New Year. Additionally, inflation concerns are starting to dramatically impact consumer sentiment, though that sentiment hasn’t spilled over to retail sales or Bank of America’s total card spending, which are still running up over 16% y/y.
Tender volume will likely stay at these higher levels (especially compared to 2019) for a prolonged period given the strong demand on the ocean and depleted inventory levels. Adding in the $1.2 trillion infrastructure package, there is the possibility for pockets of strength in tender volume levels into 2022.
As expected, tender volumes in the vast majority of the country are lower w/w due to the Thanksgiving holiday. Of the 135 freight markets tracked by FreightWaves SONAR, only 13 have had tender volumes higher over the past week.
All of the increases were in relatively small markets overall, with the exception of Detroit, the 15th-largest freight market in the country. The increases in these markets all stemmed from pre-Thanksgiving increases as tender volumes still fell on Thanksgiving Day. In Detroit, tender volumes are up 7.5% w/w but fell by more than 22% on Thanksgiving Day alone.
The four largest freight markets in the country — Ontario, California; Atlanta; Harrisburg, Pennsylvania; and Los Angeles — all experienced tender volumes pullback by over 17% on Thanksgiving Day. Tender volumes in all of these markets are down ~15% w/w, signaling that freight volumes were growing rapidly ahead of the Thanksgiving holiday as shippers made last-minute pushes.
By mode: Reefer volumes were finding solid footing ahead of Thanksgiving, up nearly 1% w/w on Wednesday. Thanksgiving caused a 15.7% decline in reefer tender volumes, but overall reefer tender volumes have held up relatively well, all things considered over the past two months as grocery spending has declined and bar and restaurant spending has accelerated. As we enter the winter season, expect reefer demand to hold up, especially in areas affected heavily by winter weather, as shippers have increased demand for temperature-controlled units to protect goods from freezing.
Dry van volumes really experienced an uptick ahead of Thanksgiving, up nearly 5% w/w on Wednesday. Like both the overall index and reefer tender volumes, dry van volumes took a dramatic turn lower due to Thanksgiving, falling 18.75% on Thursday alone.
Ultimately, the Thanksgiving noise that caused the drastic downturns in freight volumes will erase itself over the next week, but the outlook is the same. Freight volumes aren’t likely to get to 2020 levels but will more or less stay at these elevated levels compared to 2019.
Rejections fall, making it slightly easier to secure capacity
After an increase in tender rejection rates for the better part of the past week, tender rejection rates took a decisive turn lower on Wednesday and continued to slide on Thursday. The Outbound Tender Reject Index (OTRI), a measure of relative capacity in the market, fell back below 20%, dipping all the way to 19.38%, the fourth-lowest level in more than a year.
The pullback in rejection rates over the past two days is a bit surprising, given drivers tend to come off the road for the holiday, leading to elevated rejection rates. The pullback has led to the widest gap in more than a year, as rejection rates are now nearly 900 basis points (bps) lower than they were a year ago.
Another way to look at the capacity situation is through Outbound Tender Lead Times (OTLT), which gives more insight into shippers’ view of the market. When shippers are concerned about securing capacity, tender lead times are pushed further out in advance. As of right now, tender lead times are over three days, which is typical around holidays, due to the difficulty of finding drivers. Even as rejection rates have pulled back, tender lead times have increased in recent months, signaling that the capacity situation is still quite difficult.
The uptick in tender lead times could explain some of the decline in rejection rates, as loads tendered now won’t be picked up until Sunday or Monday. As drivers return to the road, expect that rejection rates will likely continue the downward slide, while tender lead times return to more normal levels.
New capacity is entering the market; however, OEMs are continuing to work through backlogs, pushing some new Class 8 truck orders to the end of 2022. Additionally, the used truck market is white-hot due to limited turnover, driving used equipment prices higher and higher.
Ultimately, conditions are still difficult but have eased significantly over the past month or so as capacity has returned to the market. This trend will likely continue into 2022, but much like in 2021 an unforeseen catalyst could throw a wrench into the capacity front.
It should be no surprise that relative capacity in the vast majority of the country loosened after tightening for most of last week. Of the 135 markets within SONAR, 54 experienced rejection rate increases this week.
The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. A blue market is any market that is tightening faster, highlighting increased prices as well as markets that should take priority. Conversely, red markets are loosening faster relative to the size of the market, where shippers are gaining some pricing power.
After tightening over the past week, relative capacity in Southern California is loosening faster than other markets of like size. Over the past week, rejection rates in both Ontario and Los Angeles have fallen by over 450 bps. Rejection rates in the markets are down to 15.5%, more than 1,250 bps lower than they were a year ago.
There was some tightening in the Pacific Northwest. The largest market in the region, Seattle, saw rejection rates increase by 521 bps over the past week. The market is traditionally a backhaul market and rejections are lower than most of the other larger markets, but the rejection rate is now 16.22%, tighter than the large Southern California markets.
By mode: Relative reefer capacity loosened faster than any of the other equipment types within SONAR. The Reefer Outbound Tender Reject Index (ROTRI) fell by over 300 bps during the past week to 35.76%, the lowest level in a month. Ultimately, reefer capacity is still quite difficult to secure, and if demand increases in the upcoming months, the likelihood of elevated rejection rates for a prolonged period increases.
The Van Outbound Tender Reject Index (VOTRI) had been steadily declining since early September, with the exception of tightening during the past week and a half. VOTRI did suffer a similar fate to ROTRI and the overall index, falling on Wednesday and Thursday, leading to rejection rates dropping nearly 100 bps w/w. The largest equipment type within SONAR is likely to continue this downward trend as new higher contract rates hit routing guides, driving the improved compliance.
The flatbed market was the only equipment type to experience an increase in rejections over the past week. The Flatbed Outbound Tender Reject Index (FOTRI) increased by 23 bps over the past week to 28.57%, just 62 bps off the year-to-date high set at the end of October. The smallest equipment type in the dataset was the last to experience that run-up in rejection rates, which is why flatbed rejection rates are still 1,200 bps higher than 2020 levels.
Spot rates plateau even though rejection rates moved higher
The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week’s data.
Despite tender rejection rates moving higher last week, spot rates have seemingly plateaued. Truckstop.com’s national spot rate was flat this week, coming in at $3.38 per mile, including fuel and other accessorials. Even with the plateauing in Truckstop.com’s spot rate this week, rates are still 17% higher than they were last year.
Of the 102 lanes from Truckstop.com’s load board, 46 reported increases last week. Outbound of Los Angeles took a step higher on five of the eight lanes, with the lane of Los Angeles to Denver increasing the most, rising 41 cents per mile, to $5.01. The increases out of Southern California are no surprise given capacity has really started to tighten ahead of peak season.
Upward pressure on rates this week will intensify as drivers come off the road for the holiday. The likelihood of rates approaching the peak of $3.60 a mile around the Labor Day holiday is slim, given the capacity situation has improved and freight volumes have yet to surge to extremely high levels that many expected.
Contract rates started to move higher this week, increasing by 5 cents per mile, to $2.70. Dry van contract rates, which are reported on a two-week lag, are just 7 cents per mile 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 are outperforming spot rates, continuing to run 19% higher than in 2020.
FreightWaves released the Trusted Rate Assessment Consortium (TRAC) spot rates two weeks ago during the F3 Virtual Experience. The spot rates are the average buy rate derived from 3PLs’ and freight brokerages’ reported booked and covered dates. FreightWaves TRAC rates are updated daily and weighted based on proximity to a specific origin/destination with a maximum of 300 miles and length of time to the current date.
FreightWaves TRAC provides average all-in spot rates for more than 650,000 unique van lanes and over 300,000 unique reefer lanes. Additionally, it provides a range, with the low rate representing the 33rd percentile and the high rate representing the 67th percentile. FreightWaves TRAC provides a confidence score between 1 and 5, with 5 being high confidence, based on the metadata to determine the rate.
The chart above is the FreightWaves TRAC rate from Los Angeles to Dallas, showing that the current rate is $4.10 a mile with a confidence score of 5. This lane has a lot of volume moving from a tight radius, which leads to the high confidence score in the rate.
Ultimately, some of the inflationary pressures on rates have alleviated themselves as capacity has returned to the market. Pressure still remains on contract rates to move higher in 2022, due to the elevated rejection rates, but the move higher may not be as pronounced as it was in 2021. Either way, carriers still hold most of the pricing power in the market, though shippers are slowly clawing it back in their favor.
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