Removal of trucking capacity supports stronger rates moving forwards

TRUCKING carriers in the US are continuing their exodus of the market due to a number of factors, including the regulatory environment, low rates, inflated wages and high insurance costs.

Market data and anecdotes from freight brokers now suggest that enough trucking capacity has been removed from the industry to support a floor under the spot market.



The supply of trucks is dropping, both directly and indirectly, with carrier shutdowns continuing at a steady clip and truckers defaulting on fuel card payments at a faster pace, reported New York's FreightWaves.



At the same time, cargo volumes have softened slightly, although they are still up two per cent year on year, while spot rates remain steady. If demand has declined incrementally but price has not, that's an indirect signal that supply must also still be falling.



An anecdote by an unnamed freight brokerage executive showcases how contracting capacity supports higher rates.



The broker quoted a message received from a 'very large' shipper, it read: 'The awarded carrier we had assigned to these lanes went out of business. You are the next provider in line.'



This means that the shippers' primary carrier priced the lane so aggressively it ran itself out of business. With the cheapest carrier going out of business, the shipper had to move the secondary provider up the routing guide. Capacity left the market and the price the shipper is paying, at least on those lanes, has increased. While it's just an anecdote, it's the first concrete example of a loss of capacity that has supported higher rates.



Other brokers are reporting that carriers are less willing to enter unfavourable markets and that they are taking losses on lanes they may have underbid.



Many carriers delivering into Phoenix deadhead into the more fertile pastures of southern California's Los Angeles and Ontario markets. Trucks hauling into Florida have to drive empty back north to the panhandle or Georgia to find good freight.



The structural set-up of those markets hasn't changed, and in fact they have probably gotten a bit worse as produce harvests move into more northerly states. What has changed, apparently, is that carriers have discovered they have a little more pricing power when it comes to hauling freight into deep backhaul markets.



Notably, the capacity bleed-off or rate support reflected in tender rejections has yet to be seen. For freight brokers, the buy side is tightening, not the sell side. Brokers are loathe to give back loads after a long period of soft volumes that lasted through May; they're accepting the freight, but it's taking them longer to cover the loads and they're paying more than they want to.



The Trucking Freight Futures market on the Nodal Exchange still expects a healthy pop in spot rates going into the fourth quarter. Since August 13, railroads have cut intermodal rates on nearly every major lane by an average of $0.09 per mile. That raises the prospect for solid intermodal volumes into the middle of the country.



Intermodal and trucking spot are expected to converge over the next few months; spot prices have room to run up and intermodal should come down, depending on how much freight CSX and Norfolk Southern want to compete for.


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