Chart of the Week: National Truckload Index Linehaul Only, Outbound Tender Rejection Index – USA SONAR: NTIL12.USA, VCRPM1.USA
The relationship between dry van truckload contract (VCRPM1) and spot (NTIL12) rates remains nearly unchanged compared to last June, as both have fallen at nearly the same pace over the past 12 months.
Spot rates appear to have hit a floor this summer, suggesting carriers have hit their park or drive threshold on the transactional market for now with contract rates continuing to drop. If the spread between these two figures narrows — even as demand falls — capacity will become increasingly inconsistent to secure.
The domestic truckload market has been in freefall since last March with spot rates reacting first and the slower contracts — typically negotiated on three- to 12-month terms — starting a slow slide in late summer. The reason is simple: Demand fell off a cliff after shippers stopped their “just-in-case” over-ordering strategy brought on by an unreliable supply chain environment during the pandemic.
The end result is after nearly two years of overheated and unsustainable demand growth, capacity has also increased significantly. The problem now is that demand has retreated almost entirely to where it was in 2019, leaving many trucks with nothing to move and a spot market full of desperation.
It’s a buyer’s market
In June of 2019 the spot rate excluding fuel costs above $1.20 per gallon — comparable to a contract rate less a standard fuel surcharge — was offering about an 8% discount. The 2019 market was also fairly loose with abundant capacity. Currently the spot market is moving at a ~23% discount.
The national Outbound Tender Reject Index (OTRI) measures the rate that carriers reject contract load coverage requests from their customers. The pandemic years of 2020-21 averaged above 20% — 1 in 5 loads rejected — while 2019 averaged around 6% — 1 in ~16. The average OTRI value so far in 2023 is 3.5% — 1 in 28.
With spot rates moving at such a strong historical discount, carriers are incented to cover everything they can under the more lucrative contract rates — keeping OTRI low. An OTRI value below 5% is indicative of a market in which carriers are in strong competition for business, pushing contract rates lower.
Combine the low rejection rate with the spot market discount and this means contract rates still have a long way to fall unless capacity exits the market significantly or demand spikes.
How fast will rates fall?
For this forecasting exercise let’s assume spot rates will not fall significantly over the next six months, but they will likely spike around Christmas as they did this past year, despite the soft environment.