As demand declines, carriers will become their own worst enemy

Chart of the week: Initial Van Contract Rate Report, Outbound Tender Volume Index – US SONARS: VCRPM1.USA, OTVI.USA

Dry truckload contract rates have fallen about 9% since the start of the summer, but have slowed, according to the FreightWaves Initial Van Contracts Index.VCRPM1), which is based on the portion of the invoices that relate only to linear shipments.

Is this a sign that shippers won’t aggressively push back on the rate hikes of the past two years?

Dry van contract rates are still more than 35% higher than in June 2020, but essentially unchanged from a year-over-year (y/y) perspective. Contract rates “peaked” in June, but were virtually unchanged from early March to July.

The stress of the pandemic era that began in mid-2020 ushered in a trend toward shorter rate cycles (a.k.a. mini-rates), allowing contract rates to move faster than they have historically. Prior to 2020, the average rate cycle for shippers was about 12 months, meaning contract rates did not fluctuate wildly throughout the year.

The big question is how motivated or experienced shippers will be, as the sharp drop in demand has made capacity easier to fill. Index of volume of outgoing tenders (ANSWER) measures the total number of tenders or requests from shippers to carriers per capacity. The number of requests decreased by 25% y/y.

The spot truck market responded quickly in March to the National Truck Index (NTI) a 14% drop over a 61-day period. By negotiating spot rates on a daily basis, they are more responsive to changes in market supply and demand conditions.

Shippers can get about a 24% discount on the spot market when looking for capacity on average. This is not a sustainable relationship over time as the contracts will move towards the spot market. For context, at the end of October 2019, the spot market was offering a 12% discount — widely considered a soft (deflationary) environment.

But there may be some hope for carriers in the near term as the contract market winds down. Why is this slowdown happening?

Transition of worries

Transport is no longer the epicenter of the shippers’ universe. Concerns about capacity have spilled over into bloated inventories and demand forecasts. Receiving these fixes has a greater potential impact on shippers’ bottom lines.

Betting takes a lot of time and energy. Mini bids do not mean that shippers send out their entire network to determine prices. As a rule, they are aimed at the most problematic areas, which makes sense, since the main goal is to save time and energy, which leads to higher costs. Now that the smoke has cleared in terms of potential, they can take a breather and reform strategy.

Shippers are also not vindictive entities looking to drive carriers out of the market. That would be counterproductive. Those who control spending better tend to have the best relationships with their partners. Most of them understand that cost inflation has affected everyone and has not yet reached its end. Carrier rates below the break-even point do not benefit the shipper in the long run.

The truth is that at this time of year there is simply not much activity in the implementation of applications. Mini bets are more of a desperation mechanism than a way of life. Larger, less frequent ladders are likely to become the defining type of contract rate index.

The challenge for carriers now is that they are competing for smaller volumes of cargo in what could become a desperate situation. This is going to be what eventually drives the contracts down… and down they will go.

About the Chart of the Week

FreightWaves chart of the week is a selection of charts from SONARS this provides an interesting data point to describe the state of the freight markets. The chart is selected from thousands of potential charts on SONARS to help participants visualize the freight market in real time. Each week Market Expert will post a chart along with live commentary on the front page. The Chart of the Week will then be archived on FreightWaves.com for future reference.

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