The price of fuel has led to lower margins in the spot freight market
Diagram of the week: National Truck Index (Liner Only), National Trucking Index, Diesel Truck Stop Price – US SANAR: NTIL.USA, NTI.USA, DTS.USA
Since the beginning of the year, rates for trucks for the transport of dry vans (NTI) have fallen by 18%, but if you remove the fuel (NTIL), they will increase almost twice to 32%.
On an annualized basis, these figures are moderate to -7% and -22% respectively, but nonetheless impressive. An important conclusion from all this is that carriers who rely on freight on the spot market have seen that their profitability is eroding faster than the rates themselves suggest.
This week’s chart shows how fuel costs (DTS) didn’t seem to have much of an impact on keeping market rates afloat.
Usually spot rates and cost inflation move in a similar direction because they are inherently interconnected. This is an extremely rare occurrence when operating costs move in polar opposition to the market rate. So what are the implications?
The spot market for trucks performs four main functions of shippers:
- To find capacity if contract carriers cannot provide it.
- To cover a purely transactional move that occurs too inconsistently to have a contractual bid.
- To get service beyond normal expectations – i.e., expedited.
- To get bandwidth at a discount to the contract rate.
For the last two years, the main factor in the activity of the spot market has been the search for capacity outside the supplier under the contract. This is confirmed by the figures of negative tenders, which on average exceed 20%.
Rejection of tenders is a measure of carrier performance, while a high level of rejection indicates that carriers are either unwilling or unable to provide bandwidth for a contract customer at a previously set rate. The level of failure in the country of about 5% indicates a relatively free market for freight.
Contract freight is largely biased towards major shippers and carriers because they have the scale and infrastructure to make bidding more efficient. Smaller fleets get the ability to carry these loads when the rejection rate starts to rise. In essence, they receive an overflow cargo.
Small carriers capture a large amount of these “rejected” cargo in the spot market because they are not large enough to establish a permanent relationship with some of the largest shippers. Prior to the pandemic consumption boom, they were largely able to take advantage of this overcrowding during seasonal booms when networks of major operators were disrupted.
Over the past two years, smaller transactions have become dependent on spot volumes and increased rates. Although there were few people who expected freight to move at such an overheated level forever, it is very difficult to know how to sustainably operate in these conditions.
Due to a widespread shortage of equipment, which, ironically, is partly due to a lack of equipment to transport raw materials for production, prices for used trucks for 3-year-old cars rose from $ 54,000 in July 2020 to $ 140,000, according to ACT Research.
Small operators get a lot of their equipment in the used truck market due to the lack of relationships with OEMs and their availability. They had to make a choice: stagnate or spend money on growth.
As many carriers make investment decisions based on an overheated and volatile market, they now remain exposed as operating costs continue to rise and the market for their services has shrunk significantly. This year, smaller operations are most at risk of failure.
Larger fleets have taken a completely different approach, and many larger carriers, such as Heartland, are attracting the anger of the financial sector for selling old trucks for a premium and accumulating cash that now looks like a head-up. Using a long-term strategy has put them in a much better position to withstand the storm if the market continues to deteriorate.
About the schedule of the week
The FreightWaves chart of the week is a selection of charts SANAR which provides interesting data to describe the state of freight markets. The chart is selected from thousands of potential charts SANAR to help participants visualize the freight market in real time. Each week a market expert will post a chart along with live comments on the first page. The Chart of the Week will then be archived on FreightWaves.com for further use.
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