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 sector continued to have a strong oversupply of capacity throughout the first and second quarters of 2023. Spot rates fell throughout the entirety of the three months even though total demand appeared to hit a floor and then slightly recover in March. The marginal increase in demand was not nearly enough to influence spot rates as they fell uninterrupted.
The national Outbound Tender Volume Index (OTVI) monthly average increased half a percent in February off January and then just over 2% from February to March. While this is positive news in that overall demand stopped falling as it had done in a dramatic fashion throughout 2022, it was a relatively weak return to seasonal movement and did nothing to stop the bleeding in the spot market.
National tender rejection rates, which measure the rate at which carriers are rejecting requests for capacity from their customers, averaged near record low levels throughout the quarter. The Outbound Tender Reject Index hovered right above 3% before falling below that value for the first time since the early pandemic in April.
Rejection rates below 4% are indicative of an extremely loose truckload environment and put significant downward pressure on rates. The lack of movement when demand increased in March is also an indicator that capacity is readily available.
The concerning thing with this index being both low and unresponsive is that it is unsustainable, meaning companies will not be able to expect transportation capacity to be available at this level for long. The low level of rejections means that there is not enough demand to support the amount of capacity that is currently available.
Unlike previous downturns in the trucking market, this downturn that started in early 2022, was preceded by an extremely long lived upturn that left many operators with ample buffers on their balance sheets. This has seemingly delayed the start of the capacity correction that will inevitably occur if demand levels remain in place.
Contract rates for van loads fell steadily throughout the quarter but at a more moderate pace than expected. Typically, more bids are implemented in the first quarter to coincide with budgets and therefore there tend to be sharper drops in the average spend from January through March. Contract rates fell at a slower pace in the first quarter than they had in the 4th quarter of 2022, indicating many companies may have already renegotiated in front of their typical cycles.
Spot rates excluding estimated fuel costs above $1.20 per gallon—comparable to a standard contract rate without a fuel surcharge—by comparison, dropped faster than contract rates throughout the quarter.
The takeaway is that contract heavy carriers are much more insulated from the down market conditions than the more spot market reliant ones. This does not mean they are immune to the capacity surplus as utilization rates are suffering, but it means they will have a smoother transition than carriers that are relying heavily on spot market or transactional activity.
The outlook for the rest of the year remains muted as there is more downside risk to the goods economy due to Fed rate increases and inflation putting additional pressure on consumer conditions. Inventories are still relatively large as well. All of this could set up a strong capacity correction, which will make the market very reactive to any demand side shifts. At earliest this looks like it may be possible in the fourth quarter of 2023, but increasingly likely the deeper we look into 2024.
In the second quarter of 2023, steamship lines continued to rationalize capacity on the trans-Pacific, blanking sailings and swapping out larger vessels for smaller ones to boost asset utilization and rates in response to soft freight demand. Our view is that spot rates will remain low throughout 2023 with risk to the downside and that spot rates will pull contract rates lower.
The Drewry World Container Index, a global composite of ocean container spot rates, has mostly stabilized after a rocky 2022 but has still fallen 16% in 2023, reaching $1,763 as of mid-May.
Steamship lines felt confident enough in April to test their first general rate increase (GRI) on the trans-Pacific since Nov. 1, 2022. Back in November, the carriers ratcheted spot rates up from approximately $2,500 per forty-foot equivalent unit to $3,000 per FEU. After a choppy few weeks of widely dispersed clearing prices, the market settled even lower and by December boxes were moving for less than $1,500. It was clear that there wasn’t yet any appetite on the part of North American retailers to replenish inventories and therefore there wasn’t any demand to support higher rates.
This time around, the GRI has been stickier: SSLs ticked up spot rate quotes from approximately $1,000 per FEU to $1,720 on April 15. On May 4, during Maersk’s first-quarter 2023 earnings call, CEO Vincent Clerc noted that the ocean carrier had regained ground in the quest to match supply to demand, utilizing 88% of offered capacity. The GRI looked like it was holding. And as of May 9, containers on the trans-Pacific were still shipping for an average of $1,432.
Container terminals on the West Coast are functioning smoothly. According to real-time transportation visibility provider project44, dwell times for containers being discharged at the Port of Los Angeles are about three days, compared to more than five days in the middle of 2022.
FreightWaves SONAR’s 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.
Weak demand’s contribution to rate deterioration is evident from the chart, as volumes inbound to the U.S. from China are down significantly year over year, but the rate of change is slowing. In March, West Coast imported containers were down just 1% compared to March 2019; on the East Coast, import volumes were down 7% compared to March 2019.
While Antwerp, Belgium’s outbound volumes have taken a major step down since 2022, there was a burst of bookings in the first quarter of 2023 that have since abated. Based on the bookings data in FreightWaves’ Container Atlas, we expect outbound container flows from Antwerp to remain anemic. Meanwhile, Rotterdam, Netherlands, has picked up some of the slack and exported containers at an elevated level in April and May compared to 2022. Rotterdam’s strength may be part of the reason why westbound trans-Atlantic spot rates have taken longer to slide than on the trans-Pacific.
This year, the intermodal market has been weaker than most had expected as depressed West Coast imports have held back both the international intermodal and domestic intermodal segments.
Specifically, SONAR data shows that loaded domestic intermodal volume (i.e., loaded 53-foot containers) declined 4.6% year over year (y/y) in the first quarter of 2023 and year-over-year volume declines intensified in April — down 8.7% during the first three weeks.
That data, which pertains strictly to dometic 53-foot containers, held up somewhat better than the weekly intermodal volume reported by the Association of American Railroads because the AAR data includes both international (primarily 40-foot oceangoing containers) and domestic intermodal segments.
The international segment, which is more closely tied to container ship volume, declined 10.3% y/y in the first quarter. Import volume is being held back by retail inventory levels that remain elevated for many consumer-discretionary categories, such as apparel, furniture, housewares and electronics. In addition, the ports of Los Angeles and Long Beach have lost share in recent months as a result of shippers’ desires to diversify their ports of entry amid ongoing labor discussions: as of mid-May, the International Longshore and Warehouse Union continues to work without a contract — the workers’ contract expired on July 1, 2022. Shippers’ concerns regarding the West Coast labor situation likely intensified after the work stoppage on Good Friday.
Unlike the domestic intermodal segment, international intermodal volume increased 7% in April from early March levels. That increase was a response to a seasonal uptick in imports (following the Chinese New Year) and container ship lines’ greater willingness to send international containers inland — a result of an abundance of international container supply amid the global downturn in international trade.
Import volumes have a large impact on the domestic intermodal market in addition to the international intermodal market because many of the international containers are transloaded into domestic containers. On its first-quarter analyst call, multimodal carrier J.B. Hunt described its intermodal franchise as being held back by only one thing — West Coast import volume. A look at the volume in the densest domestic intermodal lanes in SONAR also highlights the outbound LA lanes as the primary source of weakness — in the third week of April, the LA-Chicago, LA-Dallas and LA-Atlanta lanes posted loaded domestic intermodal volume declines of 10.2%, 29% and 13%, respectively.
Outside of the outbound LA lanes, domestic intermodal volume is more mixed, with volume up y/y in backhaul lanes such as Chicago to LA and Dallas to LA. That has led to an improvement in container balance but not necessarily container utilization since some carriers reported that intermodal equipment was parked as a result of a lack of sufficient demand. Consistent with those trends, J.B. Hunt reported a 9% y/y decline in transcontinental volume in Q1 while local loads in the East increased 2% y/y.
In addition to weak import volume, looseness in the domestic truckload volume is also holding back intermodal demand. Two SONAR charts that drive that home are van contract rates (VCRPM1.USA) and the Intermodal Contract Savings Index (IMCSI1.USA). Since May 2022, van contract rates (excluding fuel) have declined from nearly $3 per mile to $2.53 per mile, while the spread between dry van and intermodal contracts, including fuel surcharges, has declined to below 10% for all lanes and to around 14% for lanes that exceed 1,200 miles. That spread decline is largely due to timing — more truckload contracts get reset on a quarterly basis while domestic intermodal contracts are generally one year in duration. In addition, that narrow spread suggests that intermodal contract rates have further to fall to bring spreads in line with historical norms and also calls into question whether the savings associated with intermodal is sufficient to entice more shippers to use intermodal in light of shippers’ current focus on making supply chains more resilient.
Not surprisingly, SONAR data shows that the decline in intermodal volume and associated excess capacity is leading to a decline in intermodal contract rates. In April, J.B. Hunt said it has approximately 15%-20% excess equipment. Year to date, SONAR data shows intermodal linehaul rates (excluding fuel surcharges) down 8% versus 2022 with double-digit declines in the second quarter. It stands to reason that average intermodal rates will continue to trend downward as more annual contracts come up for renewal, many of which have not yet been repriced as of mid-May.
To monitor signs for when intermodal capacity might again retighten, relevant SONAR tickers include those for intermodal volume data (ORAIL/IRAIL tickers), which is based on the date containers are in-gated at rail terminals and also the SONAR ocean data, including ocean tender data (IOTI/OOTI tickers), which shows oceangoing volume at the time loads are booked at the point of origin.