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Q3 MARKET UPDATE
Stay informed about freight market conditions and other factors that can impact your supply chain. In this Market Update, we cover the following: Truckload, Less-Than-Truckload, Intermodal and International (Ocean & Air).
THIS ARTICLE COVERS
- Tight capacity forecast through 2022
- Upward pressure on pricing for all markets due to increase economy output
MARKET UPDATE OVERVIEW
As we continue to navigate the uncertainty that Coronavirus (COVID-19) has brought throughout the first half of 2021, we recognize the ongoing transportation industry constraints. From capacity to driver shortages to the rise in cost of products, the industry is still facing several challenges as we near the end of Q3. Although the industry continues to face these challenges, the service sector is beginning to normalize and we anticipate a continued rebound in Q4.
As we discussed in our Q2 Market Update, the overall common theme for 2021 as it relates to the transportation industry is capacity will remain tight and it will have an impact on cost constraints and cost increases. We are still facing the challenge of meeting demand as we end Q3. In the remainder of this blog, we will take a deeper dive into SUNTECKtts’ core services to gain a better understanding of the market impacts.
As Truckload volumes continue to climb through Q3, the industry faces several challenges including port congestion, a significant rise in inflation costs, as well as demand spikes. Retailers across the country are beginning to raise prices on goods such as toilet paper and diapers to offset shortages and shipping costs. Due to the added demand for volume, we can expect to see increasing rates through the end of the year.
The Truckload market continues to struggle with capacity and one of the many reasons is driver shortages. To help combat driver shortages, many trucking companies offer huge wage increases to attract drivers to the industry. However, we have seen extremely competitive job markets, such as construction and warehousing struggling to fill positions. Couple that with the e-commerce boom which created an uptick in driver demand as several hundred thousand courier driver positions were filled, reducing the amount of CDL candidates.
In addition to driver shortages, we are seeing semiconductor, parts and raw material shortages which crimped production schedules at equipment manufacturers. Many carriers are running multiple months behind in truck deliveries, directly impacting the supply chain. The combination of these supply chain challenges negatively impacts the ability for carriers to buy new tractors and obtain new equipment, much less finding drivers to seat them.
Q3 does not look to be settling down anytime soon as COVID-19 restrictions are lifting at a faster pace than most anticipated and the US is returning back to restaurants, bars and other dining establishments. The increase in demand causes additional strain on the food supply chain and the effect is creating volatility within the industry and the rise in rates.
Quite frequently, you will see the Truckload capacity correlating with the LTL market. When Truckload capacity is tight, shippers will utilize LTL more frequently, particularly on larger shipments. Larger Truckload shipments will likely be divided into two LTL shipments, which further congests LTL carriers, who are also competing for outsourced linehaul capacity. Due to LTL carriers currently being at or above capacity, many have embargoed certain areas, with some setting lower limits to weights or lineal feet they will pick up.
The lack of supply, with no end in sight to the increasing demand, has an obvious impact on pricing. LTL rates continue to rise faster than normal. National carrier rates are rising quickly and at higher levels than regional carrier rates, as national carriers rely on longer linehauls and purchased transportation.
Finally, these market conditions are impacting service levels. Much like with rates, shorter haul lanes tend to be faring better than longer haul lanes, where bottlenecks are more likely to delay shipments. Most carriers have suspended refunds on their guaranteed products, as they simply have too many shipments delivering after the standard service days.
As we near the close of Q3, Intermodal demand has remained strong for both the Domestic and International product lines. Intermodal service components, both rail and drayage, remain at capacity utilization levels where demand dramatically exceeds service capabilities. As a result of many months of operations at extremely high-capacity utilization levels, many railroads have taken steps to improve network throughput prior to Peak Season.
On the Domestic product, rail services have been market-focused with the intention of maximizing network velocity, specifically car and container turn-times. Certain metro areas have had volumes metered inbound to avoid rail ramp congestion gridlock as chassis and parking constraints reached critical points.
On the International product, many US ports have experienced record Q3 levels of imported containers. In a similar fashion, inland international terminals reached gridlock due to vessel bunching and slower than anticipated container deliveries to end customers – exceeding parking and chassis capabilities. The congestion seen at Chicagoland terminals forced a weeklong embargo on inbound containers from the Port of Los Angeles/Long Beach.
While the current level of service is less than desirable, discussions with the railroad service providers is encouraging and points to efforts being made to streamline network operations that will, in turn, lead to a higher level of service consistency in the future.
We continue to see upward pressure on rates from all intermodal providers in the form of both linehaul and accessorial increases. Accessorial costs associated with terminal storage and equipment usage will continue to increase with the intent of driving higher utilization levels for chassis, container, and terminal parking. Surge pricing instituted in Q2 remains in effect and has been extended to many historically non-Peak Season markets. Our expectation is that these charges will remain in place through year-end.
Shippers should evaluate inventory lead-times with the expectation that there exists the real possibility that transit times will be altered in Q4 to ensure greater consistency in on-time performance. The continuing levels of strong International and Domestic demand will present service challenges, but with planning and dialog, service issues can be minimized. Together, with all the service providers in the Intermodal supply chain committed to increasing velocity and levels of service, the Intermodal product will make the continuous improvements required to support long term volume growth.
INTERNATIONAL: OCEAN & AIR UPDATE
With a significant rise in COVID-19, especially with the Delta variant, the concern right now is that many countries have reported being worse off than they were in mid-2020.
Several Southeast Asian countries are essentially on full lock-down quarantine. As a result, both manufacturing and marine operations are operating at a fraction of full capacity and some have shut down completely. Because of the heightened focus on the Asia to US trade, particularly the return of empty containers to Asia, finding space for US exports is a significant challenge and rates are substantially higher than we’ve seen since 2019. Ocean carriers are prioritizing the return of empties over loaded US exports due to the high revenue potential of reloading the imports.
Non-stop demand and scarce capacity made worse by delays are also keeping freight rates climbing. Since late July, prices from Asia to the US West Coast, including typical premium surcharges, increased more than seven times their level a year ago. Large volume importers are reporting they are receiving only 10-20% of their volume moving under their negotiated contract levels. All other volumes are moving at FAK or Premium levels. Ocean carrier capacity levels are the highest they have ever been. The issue is not the number of vessels or the slot capacity but rather the effective utilization of those vessels. Transit times, including cargo staging at origin and the vessel voyage, from Shanghai to Chicago via the port of Los Angeles/Long Beach have more than doubled. Resulting in transit time taking approximately 146 days for a container to circulate back to the point of origin for reloading, effectively reducing “functional” container capacity by 50%.
As we move into Q4, MODE continues to work closely with carriers to ensure any embargoed areas have additional carrier options to provide consistent service through this large capacity crunch. Looking into Q4, we anticipate a continued rebound, and hope the uncertainty that the Coronavirus (COVID-19) continues to bring begins to settle.
For more detailed information regarding SUNTECKtts’ view on the transportation market, please reach out to [email protected].
With over 200 offices throughout North America, we solve a vast array of domestic, international, air, and ocean transportation challenges. Our shipping expertise encompasses small parcels, LTL, truckload, intermodal, air, ocean, and supply chain solutions to ensure every need is met.