A look into the state of the truckload, ocean container and rail intermodal freight markets in the United States.
SONAR Mode Reviews is where FreightWaves experts break down the state of the freight market in truckload, ocean container, and rail intermodal in the United States. These transportation modes have their own unique characteristics, carriers, capacity markets and volume indicators. The places where they convene, like container terminals and intermodal hubs, are critical infrastructure points vulnerable to congestion and other disruptions.
Ocean container, intermodal and truckload don’t interact in a static, linear way, however: instead, flows that are slow to build up on the ocean can suddenly clog ports. The velocity of freight movement changes as goods transfer from one mode to another; sometimes as due to the nature of the commodity, and other times due to the warehouse capacity constraints and inventory levels of the shipper. For those reasons, relationships between modes of transportation like ocean container and truckload can’t be assumed to be stable — supply chain participants must study the modes separately, on their own terms, in order to produce accurate forecasts.
The trucking market spent the past year transitioning from an overheated, supply-constricted state of being to one of the softest environments in recent history. The definition of normal has become extremely murky for domestic transportation providers who have been asked to flex up and down as fast as a day trader on the stock market. The demand shock that started during the early phases of the pandemic has fizzled and left many companies expecting a much slower goods economy for the near future.
The national Outbound Tender Volume Index (OTVI), which measures total electronic requests for truckload capacity from shipper to carrier, fell 30% from January 2022 to January 2023, with the majority of that occurring in a six-week period starting in March.
The rate of decline was sharp, but not nearly as strong as the increase in activity that characterized the summer of 2020. Backlogs and congested supply chain environments have helped support a slower pace of deterioration but have also masked the true demand deterioration.
Truckload carriers were held at bay from expanding their fleets as rapidly as they did at the end of the 2017-18 upcycle by the same supply chain congestion that caused rates to hit historic highs.
Truckload spot rates as measured by the National Truckload Index (NTI) fell roughly 21% year over year, reflecting the declining demand. Spot rates fell while the cost of operating increased. Fuel prices jumped after the Russian invasion of Ukraine threatened the global supply of crude oil. This means that the drop in the NTI, which includes fuel, understates erosion of profit margins. This hits smaller operators without buying power harder than larger fleets and may lead to strong uptick consolidation efforts or exits in 2023.
Tender rejection rates as measured by the Outbound Tender Rejection Index (OTRI) displayed a similar movement to spot rates, falling from over 20% in January 2022 to under 4% in mid-November. Rejection rates are a measure of how willing and able carriers are to move freight for their contracted customers.
During the pandemic era, rejection rates averaged above 20%. Rejection rates below 6% are indicative of a deflationary rate environment, a value that the OTRI fell below in August and never found throughout the typical peak season.
Bloated inventories due to over-ordering have been the target of most of the blame for the deterioration of trucking activity, but consumer spending on goods has been falling as well. The Logistics Managers’ Index measures inventory levels based on surveys of supply chain professionals. Values over 50 indicate expansion while values below 50 indicate contraction.
Inventory growth slowed dramatically through the back half of last year until December, indicating there was still some difficulty in accurately forecasting demand.
Capacity growth is the other looming question for the sector as that was the reason for the previous boom cycle’s end in 2019. Equipment production and labor were limited during the pandemic, but those restraints were all but undone by the end of 2022. FMCSA data suggests that trucks were added at a strong rate at the end of the year but had moderated to start 2023.
Demand erosion is the larger concern moving forward. Capacity adjusts slowly to meet demand conditions. To put this in perspective, tractor growth may be 1% over a month, while demand can and has fluctuated 20-30% from month to month.
A return of seasonal trends with the establishment of a demand floor may be the most trucking providers can hope for this year. Capacity will eventually adjust to meet that demand, which will make operational planning easier, but that will also mean a normalized rate environment with similar margins.
The global ocean container network was under severe stress in 2021 and the first quarter of 2022, before volumes began to come in and spot rates dropped dramatically. In 2023, importers and exporters will see continued normalization as ocean container volumes return to historical levels while capacity loosens further, keeping downward pressure on long-term contract rates.
The Drewry World Container Index, a global composite of ocean container spot rates, fell 78% from February 2022 to February 2023.
The eastbound trans-Pacific is one of the world’s top trade lanes by volume, connecting the Asian and North American economies. During the pandemic, cost and service were negatively correlated as rates and fees spiked while steamship lines missed their schedules, canceled sailings and waited in line for berths. Local disruptions in Asia — including lockdowns in Yantian in 2021 and Ningbo and Shanghai in 2022 — were often overcome by exporters that sought alternate ports of lading.
But pileups in the United States were common and persisted for months, both at key ports like Los Angeles and Long Beach and inland infrastructure like Chicago’s intermodal hubs. The elevated congestion and service deterioration of 2021-2022 is largely behind us; according to real-time visibility provider project44, dwell times for ocean containers being discharged at the ports of LA and Long Beach have been cut by approximately 48 hours, from five and a half days to three and a half days.
Volumes dropped substantially, and spot rates began a nosedive in April 2022 that has only started to level out in the first part of 2023. With the worst of service disruptions over, shippers will use their newfound leverage to push long-term contract rates down, narrowing the delta between long-term and short-term ocean container rates.
The Inbound Ocean TEU Index (IOTI) tracks the number of twenty-foot equivalent units on a given lane — in this case, China to the United States. It’s tightly correlated with the Freightos Baltic Index Daily from China to the North American West Coast and the Drewry Container Index for Shanghai to Los Angeles, which both measure spot rates to move forty-foot containers in U.S. dollars.
Steamship lines and ocean alliances have responded to the drop in demand by shuffling their services to reduce capacity in an attempt to set a floor under rates. But there are more structural headwinds to come, especially on the supply side. Mediterranean Shipping Co.’s orderbook for new vessels reached 1.9 million TEUs of capacity, the largest on record, and other steamship lines are on building sprees too. The breakup of the 2M alliance between MSC and Maersk may lead to renewed competition on price, and similar pressures could trouble the THE and Ocean alliances too.
Rotterdam’s and Antwerp’s outbound volumes came down from their peak in 2021 but were resilient in the fourth quarter of 2022 and are showing signs of life in 2023, trending upward. Elevated loaded imports at U.S. East Coast ports are largely an artifact of shippers avoiding the West Coast in the fourth quarter of 2022 due to fears of labor unrest, in our view, and will moderate going forward as volume softness reaches those trade lanes.
Rail intermodal volume started the year slowly, following a fourth quarter of 2022 that lacked a meaningful peak season. Through the first five weeks of the year, data from the Association of American Railroads show total intermodal volume down 7.1% y/y, on a 5.1% decline in intermodal containers and a 30.1% decline in intermodal trailers (a generally declining segment).
SONAR data shows volume weakness across both the international (40-foot, 20-foot and 45-foot) containerized and domestic (53-foot) containerized segments. Slowing consumer demand and elevated retail inventory levels are hitting volume in both segments simultaneously. However, the relative synchronicity of both segments (moving lower at the same time) is a departure from the pattern since the onset of COVID — domestic intermodal held up better than international throughout most of 2020, 2021 and early 2022.
The international intermodal segment has closer ties to import volume and ocean container availability while the domestic intermodal segment is also influenced significantly by the state of the domestic truckload market.
After volume strength in 2020 driven by import volume, international intermodal volume declined throughout 2021 due to scarcity in the oceangoing container market and congestion at inland rail terminals. Those factors made the containership lines less willing to send oceangoing containers inland, and there was an uptick in transloading imports from 40-foot international containers into 53-foot domestic containers. International intermodal volume continued to be lackluster throughout 2022 and into 2023. While oceangoing container availability issues have eased, consumer demand and falling import volume, particularly on the west coast, are currently the primary volume constraints.
From mid-2020 until early 2022, domestic intermodal volume benefited from a tight truckload market and, at times, more transloading of imports from international containers into domestic containers. Those dynamics provided support for volume, but also created greater imbalances in intermodal networks leading to greater equipment repositioning costs and reducing container turns.
After the turn in the truckload market last year, most of the shorter-haul lanes, and more of the midhaul lanes, are competitive across modes, which has constrained domestic intermodal volume since mid-2022, particularly for relatively time-sensitive shipments, amid lingering intermodal service issues. Notably, truckload capacity is loose for long-haul loads outbound from LA — dry van carriers are currently rejecting less than 2% of outbound LA tenders with lengths of haul exceeding 800 miles, down from 15%-30% from mid-2020 to early 2022.
While a small portion of intermodal volume moves on the spot market, spot rate quotes contained in SONAR (door-to-door rates to move 53-foot containers) provide a weekly indicator of intermodal capacity availability, which is often related to the availability of domestic containers.
In 2020 and 2021, intermodal spot rates rose in the third quarter as carriers anticipated capacity tightness in the fall. In contrast, falling intermodal spot rates in 2022 provided an early indicator that carriers were not expecting capacity tightness during the months historically associated with peak volume. In short, in the second half of last year, carriers did not feel the need to raise spot rates to protect capacity for contractual shippers. Intermodal spot rates have since remained depressed.
Domestic intermodal contracts are typically one year in duration, and most contracts reprice in the first half of the year. The change in contract rates usually reflects the relative strength of the prior fall’s peak season. Accordingly, tight intermodal capacity in late 2020 and 2021 led to double-digit rate contract rate increases (linehaul contract rates shown below) in early 2021 and 2022.
The muted 2022 peak season, combined with weak consumer demand and looseness in the domestic truckload market suggests that domestic intermodal contract rates should decline (excluding fuel surcharges) as they are repriced in early 2023. That is directionally consistent with intermodal contract data shown in SONAR so far this year, which shows intermodal linehaul contracts in January 2023 3.6% below January 2022 levels. The decline from last year is likely to widen as more intermodal contracts are repriced as the first half progresses.