Could maritime rate increase from China signal recovery for domestic trucking?

Chart of the Week:  Freightos Baltic Exchange Index – China to North America West Coast, Outbound Tender Rejection Index – USA SONAR: FBXD.CNAW, OTRI.USA

The short answer is probably not in the near-term, but there is reason for optimism looking ahead. Since March 14, the Freightos Baltic Exchange Index that measures the average spot rate for shipping 40-foot containers from China to the North American West Coast has increased 27% from $1,315 to $1,673. Over the same time, national tender rejection rates have crested in response to spiking demand and then fallen sharply as domestic freight volumes fall below seasonal levels this week. What connection can we make between these two figures?

Maritime shipping rates increasing from China to North America are a direct result of the imbalance between supply and demand for container shipping capacity. Earlier in the week, Greg Miller wrote about the resilience of the trans-Pacific rates and how the container lines are more able to control capacity due to consolidation.

With less players in the market, rates are much easier to control than in the heavily fragmented domestic trucking arena, which is why we see a dramatic drop in tender rejection rates — a measure of carrier availability and/or willingness to honor contracted rates. The higher the rejection rates go, the higher the upward rate pressure.

Even though the maritime shipping lines can control capacity to an extent, they have no control over demand, which has to be present for rates to have any stickiness. Since March 16, customs shipments coming from China have recovered from 4,000 to over 12,000 shipments per day. This increasing volume is a good sign that China has restored some level of production and demand from the U.S. has not entirely gone away.

Customs shipments have recovered above 2019 CNY levels. (Chart: Customs shipments from China to the U.S. SONAR: CSTM.CHNUSA)

From April through May of 2019, the average daily shipment count for China to U.S. maritime imports was 16,422 — as of April 3 the lane is at 75% of that figure. The takeaway for U.S. carriers is the fact that inventories are rebuilding while most of the country remains shut down. Once the U.S. begins to phase people back into the workplace and the economy begins to recover, there should be inventory in place ready to ship should demand recover.

The transition from ocean container to truckloads is not a direct
path. Ocean freight typically hits rail and drayage before being placed into
warehouses and hitting truckload carriers. In this case, the increase in
shipping rates should be viewed as a positive sign that maritime shipments have
supposedly found a bottom, but there is also an important lesson hidden here
for domestic trucking providers.

Maritime carriers know they will not have the demand to keep their ships consistently moving, so they cancel their sailings to reduce cost and keep rate pressure higher. This is not as easy in the trucking world with thousands of fleets authorized for hire in the U.S. versus the 10 major ocean carriers, who are also bundled into three main alliances.

Simply put, truckload carriers will probably not be able to keep rates up during this time without some form of rate discipline from the bigger providers even though it may be necessary to stay afloat — the reason for the rate increases on the ocean freight.

As rejection rates fall, so do spot rates and subsequently contracted rates. Smaller carriers will not be able to weather a long run event without help. The stimulus package does give them some support through the payroll protection program, but there are questions around whether it will be enough.

With 93% of the for-hire carriers having less than 20 trucks the government stimulus may not be enough to sustain them through more than a few months. By next winter, there could be far less capacity available, which will push rates higher when volumes return. The big question will be how high they will go and how fast.

That answer depends on how long the country remains shut down and to what level the stimulus packages will go. Unemployment levels are at unfathomable heights. The longer this occurs the less small businesses will be able to rehire their workforce and the longer it will take for recovery.

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on for future reference.

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