Uncertainty going into Q4 remains. Shippers and brokers continue to fight for capacity, and carriers continue to fight for the highest rates and best loads. While volumes seem to have leveled off — at extreme highs — demand continues to heavily outweigh supply. So how long will this all last? Justin Maze, Transfix’s senior carrier account manager, takes a holistic look to find answers.
Tightness Remains Through 2020 and Beyond
“There is no doubt markets will remain tight through the remainder of 2020,” Maze says. “September, usually a breathing period before the holiday season, has remained strong, with tender rejections at 25% (the Outbound Tender Reject Index [OTRI] sits at 25.68%), which is very unusual for this month. As consumers change the way they shop, markets will create a new trend of a prolonged heightened season rather than a rush period. Demand will stay strong, and supply won’t be able to reduce the tightness, especially in the short term.”
FreightWaves’ Seth Holm concurs: “Demand is simply outstripping capacity right now, and nothing points to that changing anytime soon. Accepted tenders remain at a historically high level, and carriers are being selective and exercising their options in searching for the highest rates and best loads.”
While volumes took a slight dip last week, they ended the week higher than where they started, and they remain 50% up year over year. The Outbound Tender Volume Index (OTVI) rose again this week by 2%.
Rates, too, continue to be unpredictable. For instance, Transfix saw long-haul rates out of the West Coast start to decline last week, but toward the end of this past week, these rates jumped back up.
“Contract rates will continue to be pressed up, as carriers take advantage of the spot market,” Maze says. “Tender volumes and rejections may not remain as high as they were in late August/early September, but even with a 10%–15% decline, demand will still outweigh supply, so there will be no easing of the tightness in the market. In fact, one of the nation’s largest carriers stated that even if their volume were reduced by 10%–15%, they still would not be able to handle it all.”
Looking to Other Modes for Answers
Maze also looked to rail and maritime for keys to predicting the coming months for trucking, as 70% of OTR TL volume currently comes from ocean freight. “Not only are maritime rates at all-time highs, but capacity is almost nonexistent,” he says. “Importers are booking weeks ahead of time, compared to the average 1–2 weeks. We saw a huge surge in imports in August, and we expect imports to remain strong. The only obstacle I see in maritime is Chinese Golden Week, during the first week of October, which will cause swings in overall volume coming into the ports. Chinese operations halt for that week, which will have an effect 2 weeks later on the U.S.
“Additionally, intermodal has spiked during the past month, and capacity is only getting tighter. Capacity has even been completely sold out at times for some lanes, forcing more freight to go over the road, as retailers continue to struggle to sustain inventory levels.
In making his predictions, Maze also considered COVID-19, the presidential election, government programs, seasonality, driver turnover and weather events. “All in all, retailers continue to fight to keep inventory steady, which spurs shippers and brokers to fight for capacity, finally funneling to carriers fighting to fill their seats,” he concludes.
Since a bottom formed this past April, earnings for trucking companies have gained strength and are expected to continue strength into 2021. Year-over-year growth in volumes accelerated through most of Q3, and industry insiders are upping earnings estimates for Q4 and beyond, according to Todd Maiden on Freightwaves.
“A change in consumer buying habits from experiences and services to hard goods that require shipping has driven the spike in truck demand. Retail sales, excluding motor vehicles, reached record levels in August at $428 billion, according to the U.S. Census Bureau. While only 2% higher year-over-year, it’s an important mark, as it was the first month without the help of enhanced unemployment benefits afforded under the coronavirus-aid package. E-commerce sales increased 45% year-over-year during the second quarter. The increase in at-home shopping has pressured supply chains and left many retailers in a struggle to replenish significantly depleted inventories.”
UBS freight transportation analyst Tom Wadewitz raised his truckload (TL) earnings-per-share estimates by mid-single to mid-teen percentages for the back half of the year. “We note that inventory replenishment is a key driver of truckload and intermodal demand, and low inventories point to strength in demand in 2H20 and likely into 2021,” Wadewitz said.
Deutsche Bank analyst Amit Mehrotra increased his third-quarter earnings estimates for TL and less-than-truckload (LTL) companies by approximately 18%, with full-year 2020 and 2021 estimates increasing by 9% and 10%, respectively.
Both contract and spot rates show signs of going even higher in 2021. Deutsche Bank’s transportation and consumer-packaged goods (CPG) equity research analysts said they see trucking rates increasing as high as 15% to 20% for CPG companies next year, with the current supply–demand imbalance lasting into 2021.
Dry van spot rates passed prior-year levels in mid-June with the gap continuing to increase, Maiden writes. “Currently, spot rates are 38% higher year-over-year, presenting a favorable starting point for carriers negotiating renewing contracts. How long the current dynamics hold remains to be seen, but many in the industry see the current trucking bull market extending longer than in the past, as several capacity constraints persist.”
With the uncertainty and volatility surrounding the US economic recovery, shippers need a partner that can help them adapt and excel — no matter the circumstance. Shippers turn to Transfix for our leading technology and reliable carrier network. As volumes drive higher, we are here to help: Learn more about our Core Carrier program and Dynamic Lane Rates. As part of our ongoing market coverage, we’ll continue to provide breaking news, resources and insight into emerging trends and the pandemic’s impact on the transportation industry.