This week’s FreightWaves Supply Chain Pricing Power Index: 30 (Shippers)
Last week’s FreightWaves Supply Chain Pricing Power Index: 30 (Shippers)
Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 35 (Shippers)
The FreightWaves Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to research the market and estimate the negotiating power for rates between shippers and carriers.
This week’s Pricing Power Index is predicated on the next indicators:
Bulls and bears are sharply divided
As longtime readers of this column know well, freight demand suffers in the course of the week of a federal holiday. This lull happens since the Outbound Tender Volume Index (OTVI) is calculated as a seven-day moving average. Such holidays, then, are included as a “null day,” bringing the typical down for the week of its inclusion. Nevertheless, we will note that shippers’ demand is currently trailing year-ago levels.
Before holidays, OTVI normally ticks up as shippers scramble to get freight out the door. Last week, we didn’t see any such scramble. So, while OTVI fell 12.06% week over week (w/w), this fall shouldn’t be as severe because it otherwise may need been. On a year-over-year (y/y) basis, OTVI is down 3.35%, although y/y comparisons might be coloured by significant movement in tender rejections. OTVI, which incorporates each accepted and rejected tenders, might be artificially inflated by an uptick within the Outbound Tender Reject Index (OTRI).
Contract Load Accepted Volume (CLAV) is an index that measures accepted load volumes moving under contracted agreements. In brief, it is analogous to OTVI but without the rejected tenders. Taking a look at accepted tender volumes, we see a fall of 14.15% w/w in addition to a fall of 1.44% y/y. This y/y difference confirms that actual cracks in freight demand — and never merely OTRI’s y/y decline — are driving OTVI lower, though the y/y gap is narrowing.
Despite all of the recent fanfare — which I had joined — about the potential of a “soft landing,” or taming inflation without triggering a recession, there are many risks to an economic recovery. One is the present rally in oil prices, that are responding to additional production cuts by Saudi Arabia and Russia in addition to severely low inventories within the U.S. Together with a strong labor market, household spending has been considered one of the important thing pillars of a possible soft landing. But when prices for gas and energy proceed to rise, especially in the course of the winter travel season, consumer confidence could deteriorate on the worst possible time, threatening each freight demand and the broader economy.
Prices of used vehicles, which have been moderating in recent months, could soon be one other upside risk to inflation. As discussed in last week’s column, the specter of a strike by nearly 150,000 members of the United Auto Employees (UAW) labor union grows larger with each passing day. And, despite yearly declines in used automobile prices, the market stays stable with tight inventories and robust sales. If production of recent cars is hamstrung by a UAW strike, used automobile prices are more likely to skyrocket once more. Unnecessary to say, such a rise is the very last thing that the Federal Reserve desires to see before its meeting in late September.
Of the 135 total markets, only 12 reported weekly increases in tender volumes, which is completely to be expected against temporarily unfavorable comps.
However the freight didn’t stop flowing throughout the Pacific Northwest, thanks mainly to the region’s abundance of produce driving reefer demand. Volumes were up 20.1% w/w in Oregon’s Pendleton market, which incorporates large swaths of Washington, and 16.1% w/w available in the market of Twin Falls, Idaho. Per U.S. Department of Agriculture data, Washington has supplied refrigerated trucks with 340 million kilos of apples and 130 million kilos of onions over the past 30 days, while 221 million kilos of potatoes have moved on reefers out of Idaho in that very same period. The time-sensitive nature of produce freight makes reefers a resilient mode when seasonality is favorable, though on the flip side, reefer demand might be hamstrung by poor crop yields and other unexpected events.
By mode: Despite the aforementioned regional strength of reefer demand over the past week, the national picture is roughly the identical for reefers and vans alike. The Reefer Outbound Tender Volume Index (ROTVI) is down 12.61% w/w and 1.87% y/y, as nearly all of the most important reefer markets took successful from the Labor Day lull. So it goes with the Van Outbound Tender Volume Index (VOTVI), which is down 12.18% w/w and a slim 0.94% y/y. Each ROTVI and VOTVI should rebound next week, though dry van volumes for the rest of the yr will likely be limited by weakened import demand — the Port of Latest York/Latest Jersey’s recent success notwithstanding.
Flatbed rejections return to July levels
Rejection rates gathered some promising momentum within the run-up to Labor Day, though these gains are slowly being lost as OTRI trends closer to 4% at present. After all, the density of holidays within the fourth quarter will provide OTRI with upward pressure, on which carriers will definitely be desirous to capitalize. Unfortunately, the one probable option to sustain OTRI at higher levels — absent an unlikely surge in demand — will likely be for the market to proceed shedding excess capability.
Over the past week, OTRI, which measures relative capability available in the market, fell to 4.23%, a change of 16 basis points (bps) from the week prior. OTRI is now only 134 bps below year-ago levels, with y/y comparisons becoming more favorable even when OTRI only stays stable.
August data for brand spanking new Class 8 truck orders was released this week, though it paints a comparatively blurry picture. On the one hand, orders were down 9% y/y at 19,000 for the month. Alternatively, August is historically a weak month for orders and last month faced unusually difficult comps against 2022, when OEMs began to reopen their order books amid a tidal wave of apparatus demand. Lingering effects of the recent semiconductor supply crisis — namely, deficient alternative rates amongst larger fleets — seem like compensating for any current demand weakness. One other possible cause behind near-term order strength is the circumvention of California’s upcoming enforcement of its Advanced Clean Fleets regulations.
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 option to prioritize rejection rate changes. As capability is usually finding freight this week, only just a few regions posted blue markets, which are frequently those to deal with.
Of the 135 markets, 60 reported higher rejection rates over the past week, though 27 of those saw increases of only 100 or fewer bps.
Capability is again tightening within the heavyweight market of Ontario, California, which hosts a network of warehouses and distribution centers that handle imports from the nearby ports of Los Angeles and Long Beach. Ontario’s OTRI is up 173 bps w/w at 5.48%, its highest reading since late March 2022 when freight markets began their rapid decline. Roughly six months ago, only one.03% of Ontario tenders were being rejected, so this recent spike available in the market’s OTRI could signal that the region’s large carrier base is being cut to size.
By mode: Mirroring the regional strength in volumes, reefer rejection rates have made significant progress over the past month and a half. The Reefer Outbound Tender Reject Index (ROTRI) hit a year-to-date high of 10.86% on Monday, well above late July’s low of three.38%. But, as is the case with the general OTRI, ROTRI’s gains are fading. At present, ROTRI is down 171 bps w/w at 8.45%.
Van rejection rates, meanwhile, proceed to be the first driver behind the general OTRI’s performance. The Van Outbound Tender Reject Index (VOTRI) has been middling over the past three weeks, currently down 5 bps w/w at 3.8%.
Flatbeds are an interesting, if puzzling, mode. Reflecting the dearth of existing homes entering the housing market (due to incredibly high mortgage rates), demand for brand spanking new construction has been rising. In July, housing starts ticked up 4% y/y, with major gains seen in single-family construction (up 6.7% y/y). Yet homebuilders’ outlook for the following six months is dim, as firms fear that persistently high mortgage rates could find yourself persuading would-be homebuyers to go for rentals as a substitute.
In late August, the Flatbed Outbound Tender Reject Index (FOTRI) reached a year-to-date low of 5.04%, marking a sour end to the double-digit readings that characterised FOTRI from late 2020 to mid-2023. But FOTRI is now up 293 bps w/w at 9.61%, once more knocking on the door of 10%. Regardless that pessimism abounds amongst homebuilders and industrial firms, September is traditionally a powerful month for flatbed demand and FOTRI should proceed to rise over the approaching weeks.
Margins squeezed by rising diesel prices
Diesel prices have been on an unambiguous rally since mid-July, rising nearly 73 cents per gallon over the past nine weeks. With the Department of Energy price sitting at $4.48 per gallon, diesel is at its most expensive level since mid-February. Global refining capability is tight, pushing many refineries to postpone or cancel scheduled maintenance in favor of constant operations. But this maneuver is dangerous, as any unexpected disruption to refining capability attributable to mechanical failure could tip the market into absolute chaos.
Within the meantime, the national spread between retail and wholesale diesel prices has narrowed significantly since July, with retail prices averaging a premium of only $1.03 per gallon. This narrowing spread makes it difficult for carriers with access to diesel at wholesale prices to make a profit in fuel surcharges, that are typically rated at retail prices.
This week, the National Truckload Index (NTI) — which incorporates fuel surcharges and other accessorials — rose 3 cents per mile to $2.30. Rising linehaul rates were entirely accountable for these gains, because the linehaul variant of the NTI (NTIL) — which excludes fuel surcharges and other accessorials — rose 3 cents per mile w/w to $1.61.
Contract rates, that are reported on a two-week delay, are ending August having recovered all the month’s earlier losses. But despite a 1-cent-per-mile w/w gain to $2.38, contract rates — which exclude fuel surcharges and other accessorials just like the NTIL — are averaging 2.5% lower in Q3 thus far than they did within the previous quarter. Outside of the standard seasonal peaks, downward pressure on contract rates will remain for the remainder of 2023.
The chart above shows the spread between the NTIL and dry van contract rates, revealing the index has fallen to all-time lows in the information set, which dates to early 2019. Throughout that yr, contract rates exceeded spot rates, resulting in a record variety of bankruptcies within the space. Once COVID-19 spread, spot rates reacted quickly, rising to record highs seemingly weekly, while contract rates slowly crept higher throughout 2021.
Despite this spread narrowing significantly early within the yr, tightening by 20 cents per mile in January, it has widened again all year long up to now. As linehaul spot rates remain 81 cents below contract rates, there remains to be loads of room for contract rates to say no — or for spot rates to rise — in the rest of the yr.
The FreightWaves Trusted Rate Assessment Consortium (TRAC) spot rate from Los Angeles to Dallas, arguably considered one of the densest freight lanes within the country, has seen a slowdown in its prior momentum. Over the past week, the TRAC rate remained unchanged at $2.09 per mile — still a long way from its year-to-date high of $2.39. The every day NTI (NTID), which has fallen to $2.29, is handily outpacing rates along this lane.
On the East Coast, especially out of Atlanta, rates have come down from July’s early peak but are still outpacing the NTID. The FreightWaves TRAC rate from Atlanta to Philadelphia remained unchanged w/w at $2.38. After a bull run that began at the tip of April, this lane was plateauing above the national average, which made north-to-south lanes within the East way more attractive than West Coast alternatives.
For more information on FreightWaves’ research, please contact Michael Rudolph at mrudolph@freightwaves.com or Tony Mulvey at tmulvey@freightwaves.com.
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