Regaining its balance

Transportation rates have remained low across all modes as providers continue to cope with the receding demand and excess capacity in the aftermath of the COVID-19 pandemic. However, signs indicate a rebalancing has begun; truckload and ocean container markets are more sensitive to external shocks than they were a year ago, revealing that, at least on some key headhaul lanes, capacity has been rationalized to some degree.

North American truckload markets

In the North American truckload market, capacity is abundant and rates are low, a boon for shippers and a persistent challenge for carriers. In 2022 and the first half of 2023, most of the financial pain in the truckload market was confined to spot-exposed small and medium-sized carriers that immediately felt the effects of downward volatility in rates. But the fourth quarter of 2023 and the first quarter of 2024 saw contract rates reprice lower for the second time, hindering profitability even at the most efficient carriers.

For instance, Heartland Express, a North Liberty, Iowa-based publicly traded truckload carrier with approximately 5,500 tractors and 17,800 trailers, typically enjoys an operating ratio in the low 80s. The operating ratio is a measure of efficiency often used in asset-heavy businesses such as truckload carriers and railroads—it’s expressed as the percentage of revenue consumed by operating costs. The higher the operating ratio, the less profitable the business. In the fourth quarter of 2023, Heartland’s operating ratio rose to 95.4 percent after revenue fell by 22.4 percent year over year, and 2022 already was a weak year for trucking.

However, there are reasons to believe the second half of this year will not be as bleak for carriers—or as easy for shippers—as the market has been over the last year and a half.

As of mid-March, the FreightWaves SONAR Outbound Tender Reject Index, which measures the percentage of all electronic shipment tenders sent by shippers to carriers that are then rejected by the carrier, stood at 3.76 percent. Carriers reject shipment tenders for two primary reasons: They don’t have the available capacity to pick up the load or the offered rate is too low and they seek more lucrative opportunities elsewhere. A rejection rate of 3.76 percent is low, indicating capacity is loose and spot rates are even lower than contract rates—carriers are taking almost all the freight offered to them.

At FreightWaves, we consider a rejection rate of 7 percent to 8 percent the threshold that becomes inflationary for spot rates. Because of a lack of capacity, enough shipments are being rejected by their primary carriers and falling through the routing guide so that the freight ends up on the spot market, driving up rates there. If the supply and demand imbalance persists and spot rates exceed contract rates, more carriers will reject their contracted freight, exacerbating the problem and sending spot rates higher quickly in a “melt-up.”

Severe winter weather across the United States prevented pickups, slowed the movement of trucks and pushed nationwide tender rejections meaningfully higher during January. That month, the tender rejection rate broke 5 percent, higher than any point in 2023 other than the retail peak in December.

The truckload market has become increasingly sensitive to externalities such as severe weather events simply because while capacity is excessive, the excess is less than it was a year ago. Lower rates and higher operating costs have pushed many small carriers out of the market, a process that will continue until supply and demand rebalances.

One “tell” for a bull market in the truckload market is that the largest outbound markets—Los Angeles, Dallas, Chicago, Atlanta and Harrisburg—will have higher tender rejection rates than the national average. In normal times, these markets have lower tender rejection rates than the rest of the country because carriers flock to them as reliable sources of freight and accept the freight offered out of those markets. However, when capacity is strained elsewhere, truck shortages can develop in those markets, leading to a spike in rejection rates.

As of mid-March, Los Angeles had a rejection rate of 3.6 percent, Dallas was at 2.78 percent, Atlanta was at 2.63 percent, Harrisburg was at 2.3 percent and Chicago was at 2.14 percent. The top five markets are showing looser capacity than the national average, which tells us the market remains fundamentally soft.

As of mid-March, recyclers have little cause to be concerned about materially higher transportation prices in the next quarter.

Ocean container markets

On the ocean, the situation is remarkably similar. Goods spending and shipment volume receded after the pandemic, reverting the ocean container market to its customary capacity glut. The Drewry World Container Index, a widely cited benchmark for ocean container shipping, was at $1,832 at the end of 2019, soared to $10,377 in September 2021 and then bottomed at $1,341 in October 2023, prior to the Red Sea crisis.

Attacks on commercial shipping in the Red Sea and the subsequent rerouting from Asia to Europe around the Cape of Good Hope increased transit times for an important trade route. The longer transit times effectively took capacity out of the market as each container ship was used for a longer time to move the same amount of freight. Steamship lines adjusted their networks and rationalized capacity on other lanes, which caused spot rates to rise. From its low in October 2023, the Drewry World Container Index bounced back to $2,964 this January, though it has since retraced some of that price movement.

Just as in the North American truckload market, what we’re seeing in ocean container markets is an industry that has too much capacity but has become more sensitive to external shocks in the past year. Excess capacity is insufficient to absorb even fairly minor disruptions without significant upward price volatility.

Looking ahead

On the ocean container trade lanes recyclers care most about, spot rates remain very low. The Freightos Baltic Index Daily for the West Coast of North America to China stands at $359 after bouncing as high as $494 during the height of the Red Sea crisis. The backhaul lanes recyclers use most often on the highway and the ocean, which go against the grain of most freight flows, should remain inexpensive as 2024 goes on. The market has become more sensitive to externalities, but recyclers’ lanes should be among the last to feel price volatility.

On the ocean, U.S. importers’ anticipation of a possible Donald Trump presidential election victory could cause them to pull inventory forward into the country to avoid the prospect of higher tariffs. If bellwether indicators became especially lopsided, more manufacturers and retailers could place their election bets by building up stock domestically, and that could change market dynamics for container rates.

On the highways, the situation is a slow simmer—every week that sees a net reduction in the number of carriers in the industry brings the market closer to equilibrium and makes it more reactive to externalities such as hurricanes. But, as of mid-March, recyclers or other shippers have little cause to be concerned about materially higher transportation prices in the next quarter.

John Paul Hampstead is a strategic analyst researching multi-modal freight markets for supply chain intelligence platform FreightWaves. More information can be found here.