The FreightWaves webinar for January, broadcast Thursday with Head of Freight Market Intelligence Zach Strickland and FreightWaves CEO and founder Craig Fuller, came after a fourth quarter that everybody in the freight space would describe as, at the very least, “challenging.”
But with signs of at least a turn in volumes, here are five key takeaways from the hourlong discussion. You can access the full webinar here.
Better trucking volumes don’t prove market is getting better for those in it
Fuller’s more optimistic view on volumes comes from data in the Outbound Tender Volume Index in SONAR, which measures the volumes of transactions. Comparing the current levels to those of this time of the year from 2020, the last time COVID was not a factor in the market, he noted that volumes are up 11%.
But with capacity still ample, the Outbound Tender Reject Index (OTRI), which measures that capacity, is not yet responding to those higher volume levels, he said. As a result, carriers and independent owner-operators are not seeing any significant upturn from the fourth quarter.
“But volume is not driving the situation in terms of causing more rejections,” Fuller said. “The reason is that there’s just too many trucks on the road. You could have a situation where volume can increase and it still doesn’t feel that way to trucking companies, which is exactly what is happening right now.”
Ocean carrier market peaks of early 2022 may never be repeated
The ocean-going freight market is becoming more balanced, Fuller said. The frenzied buying of the first half of 2022 is not likely to repeat itself: “The thought of all of a sudden everyone going out and really building up their inventories to the levels they were last year seems unconscionable,” he said. The customers who use those marine freight lines “are starting to manage their supply chains much tighter.”
The normalization has been sweeping enough that “I would argue that this may be permanent,” said Fuller. “We may be at a point where we never see container rates hit the 2022 peaks ever again.”
A factor in that may be that the seemingly ever-growing China-to-U.S. trade pattern is “being dispersed around the world,” with other nations increasingly supplying American consumers.
And with normalization and the absence of backups at ports, it “makes sense” that consumers won’t feel pressure to restock inventories “if I know my lead time has gone from six to nine months to perhaps 30 days. Right then I know I don’t need to replenish my inventories.”
Intermodal sector missed great opportunity last year
“Intermodal didn’t take off like a lot of people kind of expected it would as prices for trucking still stayed high,” Fuller said. Going forward, there was deterioration in the comparisons to earlier years “even when they actually should have had some pretty decent comps.”
Another development that hurt rails is that when the price of containers was at its peak, the economic incentive was to get those containers back onto ships rather than put them on the rails, Fuller said. That led to freight being put directly onto trucks.
“They wanted to get those boxes unloaded near the harbors and get back out there as fast as possible so they could be reloaded in China,” Fuller said. “That factor really impacted the amount of volume moved by rail lines.” And while the market has moved toward normalization, that means that plenty of trucking capacity is available in places like Los Angeles. “If I can get a truck versus an intermodal container, I’m probably going to do that if it’s cheap enough,” Fuller added.
Fuller’s more bullish outlook doesn’t abandon his controversial bearish projections
The current OTRI is, except for the depths of COVID in April 2020, “basically at the lowest point in its history,” Fuller said. A freight market will always have some level of tenders being rejected, making a level much less than the current number just below 4% almost impossible to achieve. “So we know that theoretically it’s at the bottom. It conceptually should not go lower.”
Addtdionally, he said, volume is “a much more reliable barometer of the goods part of the economy.” With normalization in different parts of the freight sector, it needs to be acknowledged that January and February are always weak times in the market, Fuller said, “and what will happen is that come March, produce will start to pick up, and then we’ve got the summer retail season.”
“I would say that we may be back to normalization on the calendar for the first time in three years,” he said.
Fuller said one of the reasons his recent forecasts appear bullish is that FreightWaves’ earlier projections were so bearish. “Just to be clear, I’m not suggesting that this is going to be a great freight cycle,” he said. “I am just saying that a lot of the bearishness that I had and many folks have in the market is not playing out right now.”
Spread between spot and contract rates heading toward normalization
Strickland said “historically speaking,” going back to 2019, spot rates were 5% to 10% less than contract rates. But FreightWaves data, according to Fuller, at times had the contract rates running $1 per mile more than spot rates as the latter market fell.
“So we’ve come from a dollar spread to about 45 cents and a more normal market would be 30 to 45 cents, Fuller said. “So we are within spitting distance of getting back to a market that feels normal.”
And that’s necessary for the market to return to full normalcy, he added. “You need to see that to happen so we can bottom,” Fuller said. “And that’s when we start to see more of the long-term trends take hold in the market.”