Q2 2022 Executive Summary From RSF Leadership
So far this year, freight rates have charted a new course. They are pushing back against the trends we saw during the initial years of the pandemic. Shippers are paying historically high rates in the contract space, leading to reduced demand in and a softening of the spot market. Pairing that with high fuel prices and other operational cost increases, we see significant new pressure on independent operators and smaller trucking companies that blossomed during the COVID demand spike.
It all points to an unclear market with the potential for stark corrections to reduce the number of trucking companies and operators as they struggle to maintain equipment and driver levels. Supply chain leaders are showing increased willingness to sacrifice price competition and some margins in the name of reliability and consistency.
Unprecedented volatility may make it tempting to leave spot rates out of forecasts and analysis. However, we think spot rates are a smart place to look to understand your potential costs and the shape of the domestic supply chain beyond just trucking. Rates respond to consumer demand, inflationary pressures, diesel prices, and a multitude of other factors. They can serve as an excellent benchmark to help leaders estimate future costs and plan investment and funding allocation. What they can’t do is solve concerns for leaders refusing to act.
The uncertainty and focus on cost make this a good time to think of what we all know is true for last-mile services. For final delivery, you can have 1) rapid service, 2) a low price, or 3) a reasonable price and reliable delivery. No one offers the fastest service at the lowest price while delivering without damage or shrinkage. Every company needs to decide what they want and realize that there’s a cost associated with that quality.
Red Stag Fulfillment has put together this look at current freight rates and the elements putting pressure on today’s prices. We hope that you get a better understanding of the current market and the beginning of a plan to address these challenges by strengthening your network and starting partner discussions.
Freight rate key data points to know
- The national average for diesel price has skyrocketed to $5.12 per gallon
- Fuel surcharges for national ground services have risen 75% since Q4 2021
- LTL carriers are charging a 42.1% fuel surcharge on average
- Ocean container rates are still above $8,000, compared to roughly $1,500 around the start of 2020
- Dry van spot rates have declined slightly from February’s high of $3.09 per mile
- U.S. eCommerce sales continue to set records after a 33% quarterly increase at the start of the pandemic
- U.S. inflation has hit 8.54%, the highest since 1981
- Consumer prices have increased 8.3% over the past 12 months
- 52% of Americans say they will cut impulse purchases this year
- At one point, experts estimated more than 150 ships were stuck outside the port of Shanghai
- Port of LA/Long Beach queues have reduced from 101 to 42 ships in 2022, while container throughput remains at record levels
Data note: Due to rate instability, global pressures, and uncertainty in the market, this information is accurate as of May 19, 2022, and will be updated as more information becomes available.
Current freight rates and our thoughts
Looking at the latest DAT Trendlines data for industry rates, we’re seeing a mixed report highlighting the market’s uncertainty and volatility. In general, pricing is starting to come down, but flatbed spot rates remain high (up 22.8% year-over-year), likely due to ongoing construction and other market actions that need flatbed equipment. Flatbed freight markets tend to perform well after winter weather ends, but experts note this sector looks similar to previous economic industrial booms. This is at odds with current consumer and producer price indexes.
Spot truck posts rose 29% in March and continued to climb through early April while spot load posts started to decline at the beginning of April. Van and refrigerated load-to-truck freight rates each were down more than $0.50-per-mile so far this year. FreightWaves notes that dry van rates could be down as much as 37% since the end of 2021, which sparked it to say that a trucking recession may be on the horizon.
March 2022 also broke the norm with an unusually soft truckload freight market. FreightWaves’ SONAR Outbound Tender Volume Index shows that volume was softer than any non-holiday period in 2021. That could mean that eCommerce companies are not following prior trends of increased sales volumes and boosted efforts to reduce inventories ahead of shifts to summer-focused products. It’s eCommerce in the pandemic era.
Cowen Research and AFS Logistics published data projecting Q1 truckload rates per mile to be 28.2% higher than January 2018. Tracking the compounded growth, the analysis found that the cost growth would feel like a 12.8% quarter-over-quarter increase because of the current 3.2% rise on a 25% higher base.
The data supports room for further rate declines
In early April 2022, truckers were rejecting around 11% of loads, compared to more than 25% the year before — with higher spikes at different points in the pandemic. Load rejection often occurs when a trucker can find a better-paying haul on the spot market. Declining rejection rates show that spot markets are not necessarily as competitive as traditional contracted loads. With the industry adding thousands of trucking companies per month (even during the height of the pandemic), competition continues to increase for these loads.
Other analyses highlight that transpacific container spot rates between China and the U.S. have been cut roughly in half between January and the end of March 2022. The global spot rate average is declining, though it was still roughly 66% higher when comparing March 2022 to 2021. Larger declines were seen in transpacific routes to the U.S. compared to Europe. Driving this seems to be reduced volumes overall, U.S. inflation concerns, and more COVID-19 lockdowns in major Chinese manufacturing hubs and the Shanghai port.
The question is: Will reduced company demand translate into reduced consumer demand? Companies weren’t placing as many restock orders in February and March because they had so much left over from the year-end. If people stop buying, that inventory extends even further, driving freight demand, and potentially costs, down. For freight rates, inventory planning changes are also worth watching in this case.
Parcel fuel surcharges could consume other improvements
Rising diesel prices have led major and regional carriers across the U.S. to raise their fuel surcharges. The spike may feel new, but there has been a steady increase over the past six to nine months. Diesel has risen to nearly $5.12 per gallon as a national average, fluctuating around the $5.10 to $5.15 mark during early April. President Biden has announced intentions to produce one million additional barrels daily from the nation’s Strategic Petroleum Reserve for the next six months, but it is unclear how much this will impact the price at the pump due to Russian oil concerns.
Carriers respond to fluctuations with fuel surcharges, protecting their revenue generation. Lately, we’ve seen higher rates than at any point in recent memory. Many express-service fuel surcharges have more than doubled since the start of Q4 2021, while ground-service rates have grown more than 75%.
Source: Rates published by carriers on their websites
UPS has also shifted to adjusting its fuel surcharges each week, up from every two weeks, to address pricing volatility. This isn’t inherently a negative for shippers, but it does make it harder to predict the pricing. For example, air surcharges declined from the week of April 11 to April 18 by more than one percentage point, which would allow for savings, even as ground surcharges remained flat.
We’ve even seen some smaller carriers projecting fuel surcharges at 50% to 56% for parts of Q2.
Uncertainty or softening of the spot rate market will likely lead smaller carriers to adjust for fuel increases quickly and more aggressively. They will feel more pressure as diesel prices remain high, so spot pricing declines make it harder to maintain operational budgets. There’s a chance many will begin selling off equipment as well. ECommerce companies need to talk with various partners to understand their position now, especially as you begin peak season planning.
Market essentials: What is driving current rate and logistics pricing?
Companies face supply chain and market forces from a record shortage of 80,000 drivers and rising labor costs to warehouse space vacancies at near-zero rates and shifting consumer wallets. These drove rate and per-shipment costs higher in the first quarter of 2022, but it may point to a softening of demand and pricing. Throughput at major ports remains high, with LA/Long Beach processing 900,000 containers a month for roughly 18 months. What’s unclear is if this will remain as the backlog continues to shrink — down from 101 ships to nearly 40 since the start of 2022.
However, pricing is pulled higher by many economic pressures, such as the average cost of diesel soaring above pre-pandemic levels. This influences carrier fuel surcharge rates that eclipse any in recent memory. The ongoing conflict in Ukraine and expanded usage patterns may keep energy costs high. Carriers are not only responding to these concerns by trying to predict and plan for future costs — caution here may slow the decline of spot rates and other service charges.
The global nature of supply chains means there are almost too many factors to mention, but we’ll look closer at some of the most significant pricing and availability pressures we see impacting current spot rates and more.
Your current inventory
Riding the bullwhip effect meant most companies struggled to keep inventory levels high during the start of the pandemic. The various responses to keep SKUs available and limit stockouts are finally catching up with the market. Many eCommerce and traditional retailers have ordered too much and face dilemmas around slow-moving inventory and long-term storage costs.
Just ask Peloton. The seller not only halted production but ditched plans to create a $400 million manufacturing facility of its own. Even as it holds inventory, the company is reducing warehouse and delivery center expansions. To capitalize on its existing consumer base, the company is lowering the cost of purchasing its home gym equipment and instead raising monthly subscription rates for its workouts.
It’s likely that your supply chain is still experiencing delays, but the important question is: Are you still feeling it?
Ports, distribution centers, warehouses, freight shipments, containers, and other infrastructure still face labor shortages, backlogs, and increased lead times. If that pain isn’t driving decisions — and we’re sure that’s exactly what it’s doing for most of today’s eCommerce brands — then you’re likely holding excess inventory. As you try to sell this off and lower your resupply points, there’s going to be less demand among carriers. The bigger the scale of this slowdown, the bigger its impact on immediate and long-term freight rates.
Russia’s war creates waves
We’ve provided a deeper look at the impact of Russia’s war on Ukraine here, but there are some supply chain disruptions worth noting in this review. Roughly 300,000 U.S. businesses rely on key production materials from these regions, notably raw materials, iron and steel, oil and energy, and plastics. Energy-related sanctions will have the most direct supply chain costs, increasing what consumers pay at the pump as well as rising costs to operate ocean fleets, rail lines, ports, cranes, and all the other equipment in a global supply chain.
U.S. price indexes and inflation rise to record amounts
Inflation in the U.S. is at 8.5% in April, the highest since 1981. This highlights the pain many Americans are feeling at the pump, in necessities, and in the cost of living. Rising interest rates may also squeeze their ability to adapt and borrow through trying times as wage growth falls behind inflation rates. The Producer Price Index notes that producers/suppliers have raised prices by 11.2% in the twelve months ending in March. That increase is the most on record since the Bureau of Labor Statistics began tracking in 2010.
In the same report, the BLS noted an increase in services for intermediate demand that highlights some of the issues for understanding the supply chain and freight rate changes. The index for transportation and warehousing services rose 2% in March, while the indexes for services outside of the trade, transport, and warehouse space declined 0.1%.
Consumer prices spike, budgets tighten
In March, consumer prices rose 1.2%, according to BLS data. Looking at the most recent 12-month period, the consumer price index is up 8.3%, also the largest increase since 1981. These increases will squeeze eCommerce shoppers, placing a greater burden on companies throughout the supply chain. The year-over-year CPI increase was pushed by rises in subset indexes, including gasoline (48%), food (8.8%), energy services (13.5%), and many others. A new study shows that 84% of Americans are planning to cut back on their spending due to price increases and inflation pressures.
Amazon adds fuel and inflation surcharge
Seller fees accounted for roughly 22% of Amazon’s revenue in 2021, and the online marketplace is working to protect that share. In mid-April, the company announced a 5% fuel and inflation surcharge for companies using its shipping and warehousing services for U.S. sales. The fee is set to take effect on April 28 and is on top of a similar rate increase that was also roughly 5% for most businesses.
Ongoing COVID spikes in China
Roughly 400 million people in total China have been impacted by full or partial lockdowns in response to coronavirus outbreaks since the beginning of the pandemic. That creates two substantial impacts to focus on for your supply chain. First, this group represents roughly 40% of the country’s GDP, around $7.2 trillion, threatening manufacturers and eCommerce businesses with significant sales in the country.
Second, on the supply chain and freight rate side, Shanghai has locked down roughly 25 million people at the end of Q1 2022, creating labor shortages and significant delays at the world’s largest port. Here’s the impact that could have on global trade:
- Shanghai managed roughly 20% of all Chinese freight traffic last year
- Inbound shipments waited an average of eight days before moving in Q1
- At high points, more than 150 ships were stuck outside the port of Shanghai, and 90% of trucks that handle import/export operations were idle
- Shanghai produces exports for some of the world’s largest consumer brands, which could lead to significant price increases for ocean freight that only some brands can afford
Many experts are increasing the likelihood of an economic recession in their forecasts or predicting one on the horizon. Red Stag isn’t taking a position on the possibility or severity of a recession, but we wanted to highlight the freight and transportation elements that are central to many of these forecasts:
- The drawing down of the transport segment of the market and its uncertainty around pricing and stability have been indicators of recession in the past. No one is sure how well that correlates today.
- Freight demand is strong, but consumer spending is climbing in some sectors and declining in others.
- Domestically, we’re seeing softening in nearly everything except areas that need specialized equipment like flatbeds and LTL.
- Fuel surcharges may be pushing up carrier revenues, potentially hiding demand changes and keeping normal Q2 and Q3 price reductions from occurring.
With so much in the air, no one can truly measure how much the market is softening. That means preparation will be needed, including plans to address a potential recession, no matter who you are, where you sell, or what your immediate forecasts say.
Where are rates headed?
Watching rates fall for the better part of a month makes it easy to lean toward more declines as the market works to even itself out, but that’s not the whole story. There are multiple factors that may help push rates down in the short term but could it rebound higher than expected. Our “normal” may be the realm of volatility.
Watch the spot market and new partners
One reason rates may continue to decline is the flood of new drivers and trucking companies entering the market. While a driver shortage is often discussed, we’re still seeing thousands of new trucks and companies enter the market monthly. Some are being contained by Amazon and similar services, though there are opportunities to spin these out if Amazon’s rates become less compelling. We may also see operators shift their focus if consumer spending hits Amazon especially hard as the company also raises fulfillment costs on sellers.
Many experts see the potential for a connection to the 2018 and 2019 markets. This similarly had a booming year with many new entrants, only to see more than a thousand trucking companies close the following year. Many, many more consolidated when hit with the one-two punch of the market losing its capacity shortage and overall demand shrinking.
If diesel remains high as rates drop, many owners and operators will face challenges in affording the new equipment they purchased. Potentially piling on top of that is the chance for used truck pricing to drop as demand declines, making it harder for companies to recoup investment for the equipment they can’t use. With backups in China — such as the Port of Shanghai running out of room for refrigerated containers and most goods sitting for more than a week — shifts in containers, ocean lines, and other availability may impact domestic spot rates even if companies solve local issues.
If the spot rate comes down some but contract rates rise in 2022, the flattening out of the freight volume may not deliver the savings and price reductions many companies hope.
What should eCommerce companies do now?
Today, companies need to look at their supply chains, identify areas of uncertainty, and start to build resilience and options. Spot rates are trending down some, but capacity issues remain, and global markets are stressed. Focus your efforts on relieving that stress in your supply chain.
The pandemic has taught us not to assume that goods will easily and freely flow across global supply chains. Risk mitigation and alternative sourcing must become default efforts for supply chain managers and operations professionals. If your supply chain understanding rests on experiences established in the 2010s, the next black swan event may harm you even more. No chain is insulated from smaller or local events. These disruptions highlight weak points that easily drag an entire chain down.
Remember the ports
When you’re putting a plan together, it’s important not to overlook the lessons of the past few years. Think of the port situation you faced and how your supply chain responded. Use that as your guiding star.
Throughout the pandemic, the Port of LA/Long Beach got so congested that people looked for alternatives. They started pushing containers to Seattle and Portland, but then these got so bogged down that they started charging enormous fees. So, companies then began looking across the East Coast. Unfortunately, this solution only moved the problem around, and with the East Coast flooded even more ports just have containers sitting for days and days.
Some places, like Savannah, found remedies for these containers, but it takes time. While this reshuffle was happening, some steamship lines decided to skip Savannah because it was backed up, too. Everything started moving over to Charleston, and within a month there were dozens of vessels off the coast.
Moving forward in 2022
The supply chain musical chairs game began with the pandemic and will likely continue to be a feature of the rest of 2022. Companies are trying to fix the bottlenecks as they arise. Unfortunately, addressing immediate issues often means creating new bottlenecks just beyond the horizon. Problems keep moving and operations leaders will need to stay on top of their supply chain. The solution is vigilance, requiring you to be dynamic and keep responding.
In the short term, companies may see a little relief in some freight rate pricing. But with the current level of eCommerce demand and the conflict in Ukraine, fuel surcharge increases will likely diminish typical Q2 and Q3 cost reductions. Not all operations will be impacted substantially by sanctions or European volatility. However, the shutdown in Shanghai and delays at other ports will have a ripple effect that hits even domestic supply chains.
The focus for operations leaders will be to determine whether container rates, even though they are going down now, are going to go back up when production returns. And if production delays cause you to need larger resupply volumes, will you be hit harder in both budget and customer demand?
These are incredibly complex questions that can take a team of experts to answer. Not only do you need internal support, but your partners and vendors and suppliers should be willing to help. Resilience comes from that network.
Start conversations early
Typically, there are solutions for specific problems, but we’re not seeing any broad-stroke approach that’s going to help every company. If there was, we’d share it, fix global supply chains, and retire on a mountain of gold. Unfortunately, no one has found anything capable of fixing the current supply chain mess and freight rate concerns.
So instead, we all need individualized plans to address the specific concerns facing our suppliers and associates. You need dependable partners like Red Stag that are willing to help you identify issues and tackle them one at a time. We have in-house expertise that can help, and we should be a support system you leverage, among others.
According to our analysis, it would be shocking if freight rates and supply chains ever moved back fully to pre-COVID costs or capabilities. That’s true even as the market softens. So, when you see rates start to decline, have a conversation with your brokers and forwarders about if that will come to you. If it’s a good true partnership, they know what it’s going to take to move your freight.
No one can do it themselves, but the resilience modern supply chains need comes from support. Send an email or pick up the phone and reach out to your network. Ask. Our position is that we’re here to support you and if you have an issue that we can’t solve ourselves, we’ll work to get you into contact with the right people to move forward. Just don’t delay these conversations until the next major event happens.
Lorrie Watts, Director of Logistics
Lorrie Watts is the Director of Logistics at Red Stag Fulfillment, a leading 3PL focused on heavy, bulky, and high-value eCommerce products. She has extensive experience in the logistics and supply chain management space focused on supporting partner growth, covering both international and domestic efforts. Lorrie is excited to share her experience and knowledge to help partners problem-solve their supply chains in today’s challenging environment. She is also an avid hiker and enjoys spending time outdoors with her family and dogs.
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