The market swings: Carriers on top in rate negotiations as shippers scramble to nab capacity

user-gravatar Headshot
Updated Aug 24, 2020
Flatbed has shown surprising strength in the recent freight recovery, due in part to manufacturing coming back online and construction remaining strong. “Lumber has been in high demand,” says Jim Nicholson, vice president of operations at Loadsmart.Flatbed has shown surprising strength in the recent freight recovery, due in part to manufacturing coming back online and construction remaining strong. “Lumber has been in high demand,” says Jim Nicholson, vice president of operations at Loadsmart.

Rising freight demand, still prominently driven by retail and consumer spending, has sustained well into summer, defying usual seasonal trends and giving carriers a strong hand to play in rate negotiations on both the spot market and for contracts heading into the 2020 holiday season and into 2021.

Though lingering pitfalls could jeopardize the sustained freight recovery that began around Memorial Day, freight volumes year over year on the spot market this summer are trending well above both 2018 and 2019 levels, although July and August typically are lulls between the spring freight season and the beginning of the holiday-driven freight season that spans from October through year’s end.

“We’re absolutely at an inflection point,” said Jim Nicholson, vice president of operations at digital brokerage Loadsmart. “Volumes continue to soar. Capacity is very constrained. As long as volumes continue to rise or even stabilize, we should see rates continue to rise.”

It’s not that the total number of loads moving is necessarily higher than the robust 2018 and decent 2019. Instead, it’s that the supply chain is in such disarray that the spot market is swelling with freight that in a normal year would have been hauled under contract. Accelerating spot rates are forcing shippers grab contract capacity as they can, even if it means paying higher rates to do so.

“The market is strong, and the rollercoaster keeps going up and up,” says Geoff Turner, CEO of Choptank, a mid-sized brokerage based in Maryland. “Rates some weeks are up by 5%, 8%, 10% week-over-week in some lanes. That’s hard to price, and the shippers that are starting to get out in front of that and lock in capacity are going to be the ones that benefit in the latter half of the year.”

Strong performing sectors include consumer goods, food and beverage and construction, said Brian Fielkow, CEO of the Houston-based Jetco Delivery. Those sectors have seen rates up as much as 30% from April lows, he said, while industrial, energy and manufacturing continue to lag.

COVID has changed consumer behavior, with fewer people opting to take vacations and travel, said Fielkow, and instead seeking to upgrade home fixtures, perform home renovations or invest in exercise equipment. “People are spending money,” he said, “but they’re spending money on freight intensive things.”

That shifting consumer demand is one of the two pillars driving the bulge in spot market freight. Shippers have had to dump unanticipated loads on unfamiliar lanes into the spot market. Likewise, carriers are rejecting optional loads within existing contracts, which forces those rejected loads onto the spot market, too.

“Networks have fundamentally shifted. We know the narrative,” said Bill Dreigert, head of operations at Uber Freight, noting consumers are staying home and spending more on home goods, groceries and other retail items, much of which is being purchased through e-commerce channels. Likewise, beverage providers, for example, are seeing a surge in demand for groceries while restaurant sales have “dropped off a cliff,” he said.

“Each of these networks have different origins and destination points,” he said, which is causing “demand and supply to shift to different markets and different lanes.” Though the current surge in spot rates should drive more truck capacity to market, “it’s not something that can be solved over night,” Dreigert added.

In the latter part of 2017, spot prices jumped due to manufacturing activity, hurricane relief efforts and the ELD mandate. “A perfect storm of sector-wide increases in demand and a supply pinch,” said Michigan State University Associate Professor of Logistics Jason Miller. Now, certain verticals, rather than a strong market overall, are driving the spot market, which may not be sustainable, he said.

Contract pricing gains that have been made since 2017 had all but been erased during the COVID pandemic, but “what we have seen in July for dry van was evidence of a very strong recovery in contract pricing,” Miller said.

Shippers are eyeing short-term contracts with carriers, said Uber Freight’s Dreigert, even at higher per-mile rates, to ensure they have necessary capacity through year’s end and to hope for better leverage for re-bidding freight contracts in the coming months as the market settles. “If I were a carrier,” he said, “I’d be trying to lock in longer-term contracts at a higher market rate,” before market conditions swing back toward shippers’ favor.

“As unpredictable as the world is right now, it’s more predictable than it was in May or June,” said Aaron Tezzaras, chief economist at Convoy. “Businesses and consumers are settling into new patterns,” meaning shippers will likely pin down something of a new normal for freight flows and, thus, potentially ease some of the pressure on rates.

More broadly, despite the ongoing freight recovery, the economy itself is still in a poor state. Unemployment is still at a historical high mark. GDP is reeling from its worst-ever quarterly loss. Oil demand and oil pricing still hasn’t rebounded after falling off a cliff in March and imports and exports are both down.

Miller said oil drilling rig count has plummeted 73% since August 2019, reducing demand for flatbed surface. “[New] oil well drilling has come to as near of a standstill as we’ve ever seen in the United States,” he said.

The economy is growing, said Caterpillar Chief Economist Laura Speake in an FTR webinar last week, but growth is starting to slow. Manufacturing levels are recovering after slowing to a halt in March and April, but many services such as air travel, events, restaurants and medical services like dentistry are lagging behind the rest of the recovery seen in retail and manufacturing, she said.

While those sectors alone may not account for much freight, relative to goods-heavy sectors like construction, manufacturing and retail, they “do have an outsized effect on the overall economy,” she said, noting services account for about 60% of U.S. GDP.

A lagging service sector recovery could cause more business failures and layoffs, which would put a drag on the entire economy. With relief and stimulus money from the federal government mostly running dry, and with Congress dragging its feet on any potential next phase, consumer spending is a key question mark for the recovery to continue, said Speake.

“Households are pulling back,” she said. “Consumers are saving as much as they can because of the uncertainty,” which pulls money out of the economy. It could be well into 2022, said Speake, before GDP returns to 2019 levels.

Miller said retail sales as of July are up 15% year-over-year. “Unheard of growth,” he said against an average of 6-7%.

Durable goods production (like cars, lumber and machinery) have plummeted 10% year-over-year. The softening of the durable goods segment started early last year but was accelerated by COVID shutdowns.

E-commerce sales spiked 25-30% year-over-year in July, Miller said. However, with consumer sentiment mostly back to the same low level as during the early throes of the pandemic, the pace is likely unsustainable long-term.

“Without additional stimulus [money], I don’t see how the sky high year-over-year gains are going to be maintained,” Miller said, adding it was feasible to settle in the 15%-20% range.

-Jason Cannon contributed to this report.