What Keeps Load-To-Truck Ratio Low When Freight Prices Are Through The Roof?
Capacity migration, trade lane imbalance, and driver shortage could be some of the reasons why the load-to-truck ratio remains relatively subdued since the Polar Vortex week earlier this year
A hearty welcome to the 25th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
Nothing has changed within the world of supply chains, as ports remain congested, intermodal hubs remain overwhelmed, and freight capacity remains scarce. All, while consumer demand over the next few months is expected to consistently stay at elevated levels.
But in the context of a tight market, something does not seem right when we look at the spot market load-to-truck ratio (LTR) across all trucking modes. LTR is a good metric to look at, as it usually is a strong predictor of freight movement. Then again, it’s 2021, and nothing works the way it should.
Considering that the truckload freight rates have surged, it’s reasonable to expect LTR to be at historically high levels. Finding trucking capacity amidst mounting volumes has been the problem, surely?
But stats state otherwise. LTR values for all three modes—flatbed, dry van, and reefer—have been well below this year’s high during the polar vortex and even the more recent Labor Day weekend. Of these three modes, dry van is of greater interest than flatbed now, as flatbed’s fortunes have been dented by a slowdown in the construction market and the auto industry. (Flatbed trucks carry materials for construction and manufacturing, like metal piping, concrete, heavy equipment, and the likes).
Load-to-truck ratio (LTR) values for all three modes—flatbed, dry van, and reefer—have been well below this year’s high during the polar vortex and even the more recent Labor Day weekend.
Over the last year, the explosion of interest in e-commerce ensured the demand for dry van capacity climbed from strength to strength. (Dry van trucks carry palletized or boxed freight, which includes most e-commerce products). So, it is paradoxical to see LTR not peaking at this time of the year for the dry van spot market.
There has been no dearth of loads for dry van, considering retail truck-tonnage (excluding auto parts dealers and gas stations) has remained higher than usual—courtesy, data from Jason Miller, associate professor of supply chain at Michigan State University.
While truck tonnage does not directly correspond to an increase in dry van volumes, it does reflect an increase in volumes across the retail market—a considerable portion of which lands in the dry van segment (and the reefer segment). What then can explain why the LTR value on the dry van spot market is surprisingly low (in the context of this year), considering every other metric suggests supply chain chaos?
“Some of it could be down to the migration of capacity from leased-on to being independent in the spot market,” said Dean Croke, principal analyst at DAT. “Consider you’re a power-only trucker that’s leased to a major manufacturing company, making $1.50 per mile. But you’re always interested in the spot market—and so when spot market rates hits about $2 a mile, you realize you could be making more money with your own trailer. And what do you do? You leave the company and start hauling loads on your own, on the spot. Prices are hitting $2.50 a mile now, which explains the migration as there’s money to be made in that $1 margin.”
True to this, the average fleet size is down about 6% this year, and this mostly translates into truck capacity added into the spot market via independent owner-operators. That said, large carriers are still rejecting over a quarter of the loads citing their inability to source trucks.
The average fleet size is down about 6% this year, and this mostly translates into truck capacity added into the spot market via independent owner-operators.
“There’s so much imbalance in the market right now at a lane level, as there’s abnormal demand for certain commodities. For instance, you could be pulling $5.67 a mile from LA to Las Vegas and back,” said Croke. “Take the fresh produce market—rates usually drop back down after the summer produce season, but now it has only bled into the fall produce season. Spot rates are already high coming into the fall produce season, and since produce markets are regional, freight prices across specific lanes are going to be on fire.”
While LTR is lower than anticipated, freight prices may remain high because carriers refuse to haul loads unless shippers pay market-beating rates. “Normally, you’d say when people post more trucks, capacity is loosening. But it’s not the case today. Some carriers are posting capacity only to try attracting shippers that are okay with a higher rate. It’s a carrier market today, and they know it,” said Croke.
Also, freight prices are rising because it is getting harder and harder to recruit and retain drivers. “Large truckload carriers have a 87% turnover while LTL has 18%, which is pretty high. Everybody is having trouble finding drivers, even the last-mile jobs where drivers do short hauls and are home every night. The long-haul truckload drivers are even harder to come by,” said Croke. This has forced carriers and private fleet companies to offer higher remuneration for their driver recruits, which will eventually creep into freight costs.
So what’s the situation over the next few weeks? Croke contended an almost direct correlation between when volumes hit the port docks and when they hit the spot market. “There’s an 8-10 days lag at the port. With intermodal networks being jammed, the only way to take out freight from the port is via trucks. True to this, load posts out of LA were up 41% last week. I see a tight correlation here with the spot market as the contract market is already tied up,” said Croke. If this continues, we can expect the LTR value to rise up eventually.
Croke contended an almost direct correlation between when volumes hit the port docks and when they hit the spot market.
“The stress in the network is not going to go away until demand falls off,” said Croke. "Maybe it falls off after the Chinese new year when everything cools off, but what if Chinese workers do the same thing like this year and don’t go home, fearing they could carry COVID-19 to their family? What if volumes never cease flowing into the US?”
At this point in time, it seems to be anybody’s guess on what could happen.
The Weekly Roundup
The semiconductor chip crisis has remained in the news for much of this year, but it looks like the situation has now worsened. A fresh COVID-19 outbreak across SE Asian countries like Malaysia, Vietnam, and the Philippines, has caused production halts in factories that cut and pack semiconductors. This has worsened the already tight semiconductor availability, jolting auto manufacturers across the world.
Supply chain visibility platform project44 has acquired last-mile technology startup Convey for $255 million, with the acquisition enabling project44 to sharpen its real-time transportation visibility platform (RTTVP). With the buyout, project44 will have access to Convey's high-profile clientele like The Home Depot, Nieman Marcus, and Ferguson Enterprises.
Major container line Ocean Network Express (ONE) has announced its plans to join the 'call to action' alliance of more than 150 stakeholders within the maritime, energy, infrastructure, and finance markets to decarbonize its operations by 2050. ONE's chief executive Jeremy Nixon mentioned that private players like ONE require governments to work together to deliver policies and investments critical to reaching the goal on time.
Logistics real estate firm Prologis has expanded its warehouse training program across six more locations in the US to alleviate the issue of skilled worker shortage. E-commerce growth over the last year has spiked the need for warehousing, with capacity going at a premium as shippers fight for space. While the industry needs workers urgently, fresh labor inflow continues to fall short.
...said who?
"Everything has changed. You just go to work in the morning, you turn on your computer, and then OK, fantastic, there has been another delay."
- Klaus Müller-Blech, nicknamed 'the Christmas King of Germany,' is finding it impossible to get Christmas decors from Asia to Europe due to the current supply chain crisis
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