Capacity Crunch
The Good
Limited capacity has opened up in cities and spots around the country.
Nothing to get excited about yet. But hope springs eternal.
The Bad
Shippers are getting extremely frustrated with carrier partners who just can’t
provide enough capacity. This is truckload, intermodal, LTL, all of it –
capacity continues to disappoint as the supply chain gets hit from all sides.
Shippers who thought they had contracts are now being forced into
the spot market. Carrier lanes are changing.
And truck & driver shortages are getting worse.
Right now, if there’s any trouble with a shipment it quickly falls into peril,
leaving shippers scrambling to find capacity.
For shippers, it leaves a bad taste in their mouth about the carriers they
work with. For the carriers, they just wish shippers would understand that
so many variables are outside of their control.
TRUCKLOAD
Relative capacity loosens to kick off Q4
The Outbound Tender Reject Index continues its downward slide which
started back in mid-August. Relative capacity was loosening across most
of the country as rejection rates fell in 86 of the 135 freight markets.
By mode, reefer rejection rates were the most stable with capacity still incredibly tight. When the temperature-controlled market really turns on ahead of the holiday and winter months, shippers will have a tough time securing capacity.
Relative dry van capacity loosened significantly last week.
Van rejection rates have been trending down since Labor Day, but the most
recent dip was the largest move in over three weeks. Ultimately, van capacity
will feel pressure again as the holiday season closes in. The flatbed market is
finally showing signs of life as rejection rates head upwards.
We may be seeing activity in the industrial economy, driving flatbed demand
higher and causing a tightening of relative capacity.
Truckstop.com’s national spot rate, which includes fuel surcharge and other accessorials, increased by 5 cents per mile over the past week to $3.53.
Of the 102 lanes on the load board, 69 reported increases last week, with
Chicago becoming the expensive sweet-spot.
The national spot rate continues to climb because of demand while rejections
suffered a slight pullback. Most likely pointing to freight moving into the spot
market and bypassing the contract market.
The national spot rate continues to run over 20% YOY.
With the recent pullback looking like a short-term hiccup and instead of a sign
of future rate changes. The slowdown in contract rates came two weeks after the
dip in spot rates, which we expected. Contract rates continue to close the gap.
And with rates up over 25% YOY, they’re likely to climb right through to 2022.
Ultimately, the upward pressure on freight rates is likely to remain in place for
at least six months and probably beyond as supply chain constraints continue.
Carriers still hold the pricing power
after a sluggish start to Q4
Seasonal pullback in volume is just the quiet before the holiday storm
The Outbound Tender Volume erased last week’s positive momentum as tender volumes slid. The OTVI has dipped back below the 16,000 mark, pulling back by
1.5% week-over-week. As it stands now, absolute tender levels are up just 2% YOY.
This pullback at the kick-off of the fourth quarter is a trend the OTVI has experienced over the last few years. It happens when freight volumes ramp up into the close of
the third quarter and shippers attempt to move goods off their docks. October is
generally stable before levels explode come November and the peak holiday season.
The index is signaling that shippers are sending out more tenders than ever before. Even with the pullback in accepted tender volumes, levels have expanded YOY.
Accepted volumes are running up over 10%, the widest since early August.
With increased import demand, freight volumes will certainly climb through fourth quarter. Imports have already been at peak-season levels throughout the entire year.
And ocean bookings from China to the U.S. just set a new all-time high a couple
of weeks ago. That’ll definitely add to port congestion.
But not all of the larger markets experienced the dip in tender volumes.
A few areas in the Northeast saw growth – some up to 4%.
The Chicago freight market continues to be one of the most volatile in the
country, especially compared to the other large markets.
The overall outlook for freight volumes in the final quarter of 2021
is very strong, with rates moving higher through the rest of the year.
Truck transportation jobs rose slightly in September
Yes, truck jobs grew modestly in last month. But it’s surely a disappointment to the legion of recruiters trying desperately to fill truck and tractor seats.
And a key indicator that we’re nowhere near our pre-pandemic strength,
adding to the current capacity woes.
The seasonally adjusted number that economists watch added over 2,400 jobs
through September. Warehouse and storage jobs had another surge climbing
to almost 1.5 million, a gain of 15,600 jobs.
Let’s hope fourth quarter offers the big jump we’re all hoping for.
Biden administration pushing shippers &
carriers to expand hours
Rail & truck partners are next targets to fix supply chain issues
John Porcari, tapped by President Biden as port envoy to the administration’s
Supply Chain Disruptions Task Force will work to expand the operating strategy
that began in September at the nation’s largest container ports.
“We’re working on the rest of the supply chain, including railroads, trucking and the major customers you all know — the Walmarts, FedExes, Home Depots and others,
to commit to operating 24/7, because off-peak capacity is what we need right now
to fix a very serious problem.”
Extended gate hours at the ports are being used to help flush out loaded containers sitting at the docks. Inland locations with connections to truck & rail are being set
up to provide off-dock areas to move containers filled with imports that are taking
up too much space at our ports.
“We think this could make a huge difference not only for importers, but as we clear
out our yard, open up the field to receive exports and get back to some of those
longer [receiving gate] windows we had.”
The FAST Act — the surface transportation funding law that Congress is
attempting to reauthorize — includes a provision that requires each state to develop
an immediate and long-range freight plan. Porcari said he wants states to improve them. “A truly intermodal plan takes the entire goods movement chain from its source
to its ultimate destination and looks at what kind of projects are needed — road or rail capacity, inland port transfer sites, on-dock improvements, everything,” he said.
ECONOMY
Will high freight rates cause hyperinflation?
Since 2019, transportation rates are up over 20%
The short answer: Not any time soon.
Because the reality is that for most products, transportation is but a small percentage
of the overall item. Beside raw materials, most of the cost comes from marketing and retail markups. Right now, domestic logistics represent only 8% of GDP, down from
11% in 1980. That’s because supply chains have become far more efficient – remember waiting 6 to 8 weeks to receive products? Now it’s a matter of days or even hours.
Quite simply, when spread over an entire trailer or container, most consumer
products pay very little in transportation. More concerning for inflation is not having
the goods on the store shelf. Scarcity drives higher prices, as we saw last year with
toilet paper. So ignore the freight rates and focus on the shelves.
When you start seeing empty stores, you can bet the market will respond
with higher prices. It’s that simple.
High costs limit capacity growth in trucking
Truck price growth is outpacing trucking rate growth
In just a year, used truck prices have increased by over 50% for 3-year-old models. These kind of cost barriers will certainly limit the small fleet/owner-operator
growth, helping to extend the capacity crunch on all levels.
It’s pretty well-known fact in the trucking industry that more than 90% of the fleets operating in the U.S. have less than 21 trucks.
Starting a trucking company are basically limited to the size of your wallet and
your ability to finance a vehicle. The cost barrier has grown sharply – to a point
where many are likely to forego the effort.
Supply chain issues have ironically plagued trucking OEMs as their own production limitations contribute to the limited supply of vehicles available for transporting
goods. Class 8 orders stalled over the summer, not due to seasonal spending
patterns but because of delays in production capabilities.
With new equipment becoming less available, larger fleets that normally purchase
most of these new trucks are holding on to their older vehicles for longer periods
of time. Used trucks are the most economical way for smaller fleets and
owner-operators to start and grow their business.
But paying $90K for a truck is quite different than spending the $58K they did just
a year ago. Truck prices are very high at the moment. But even with expanding
margins, this price is becoming much harder to overcome. Looking at the data,
the usual operating ratio is below 90. This August, it was 93%, meaning
operators are making just 7 cents for every dollar of revenue.
And that doesn’t even include taxes or interest.
With truck prices rising to $90,000 the operating ratio grows to 98%
leaving two cents for carriers.
Even with freight rates being so high, carriers aren’t realizing the benefit.
Which in turn, speaks to the very real possibility that these increased
freight rates are here to stay.
Because truck price growth is outpacing trucking rate growth.
For sure, this has already deterred a few entrants and inhibited fleet
growth. It’s also occurring as driver wages are expanding rapidly, further
eating into carrier margins. So while the current cycle appears to still have
plenty of fuel behind it, it is not sustainable.
INSIGHTS
Would ending the China tariffs offset our supply chain pain?
Port congestion is acting like a tax and importers want the government to provide relief.
Tariff exemptions on face masks and related medical supplies have been extended but major trade associations want more of the Trump-era tariffs rolled back to help businesses with unprecedented costs from port congestion.
So far, the Biden administration has resisted calls to lift tariffs on over half a trillion dollars of Chinese goods. The industry complains that the so-called Section 301 tariffs put in place by Trump raise prices for Americans and are completely ineffective in changing China’s behavior. Across the board relief would help manufacturers, farmers and retailers offset the extraordinary costs created by supply chain disruptions
Disruptions could leave holiday
shoppers & retailers disappointed
Holiday season in peril.
Supply chain disruptions have finally gone mainstream.
A recent survey found 50% of consumers plan to have their 2021 holiday
shopping completed by Cyber Monday – usually the unofficial kickoff to
the e-commerce holiday shopping season.
Research found that 5% of families have already completed their shopping;
12% said it would be done by Halloween; and 33% would be finished by Thanksgiving.
For retailers and brands, that means the push to get product into stores and warehouses has never been greater. But with record number of cargo ships
sitting offshore at U.S. ports, that merchandise may not make it this holiday season.
By the end of September, the U.S. set a record of 65 container ships waiting to be unloaded at Los Angeles & Long Beach, which is causing more strain and stress on
the U.S. supply chain. A full one-third of all shipments to the U.S. flow through those
two ports and we’re seeing a 25- to 30-day delay in clearing these shipments from the docks. Many retailers will be struggling to fill their shelves for the holidays. Hard-to-find items like sneakers and anything coming from China and Malaysia will be hard to find.
Christmas in January
The port backup will ease. But it may take until next year for all the goods on
those ships to make their way into the U.S. supply chain.
In fact, look for some amazing deals once the shipping containers are unloaded,
but that not coming until January or February. Maybe March. Brands and shipping carriers alike took last year’s holiday season by storm — and not in a good way.
Nearly 1-in-5 consumers have started shopping earlier this year because they’re
worried about shipping delays. Another 42% expect their packages to be delayed by
at least a day. Shipping problems are extremely disappointing during the high-stakes holiday gifting season. And proves why brands must take steps to manage expectations and communicate proactively.
- Jim Pearson is the President & Founder of JTR Logistics.
Transportation professionals who expertly navigate the latest technologies while offering decades of experience & know-how. People who always get ship done.
Source: FreightWaves.com Thursday, October 10, 2021.https://www.freightwaves.com/truckload
Supply Chain Dive.com Thursday, October 9, 2021.
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