By Benny Lim.               Photo：Lê Minh

The cost of moving goods is about to get a lot higher. A market reversion are forecasting that will send spot rates soaring above contracted ones for the first time in over a year.

For some observers, the reversion represents a return to normal. Typically, your last-minute, spot purchases should be more expensive than your contracted ones, but freight markets started softening in early 2022 and inverted in April of that year, as spot rates dropped below contract ones. Rates continued to slide for the remainder of 2022. Most recently, net line hauls (shipping costs exclusive of fuel surcharges), hit $1.60 per mile, down from a more typical $2.30 of early 2021. All the while, shippers gained more negotiating leverage.

Market Reversal

As the saying goes, what goes down must come up. And various indicators now suggest the freight market will invert in a way not to the benefit of shippers. After bouncing along the bottom for the past few months, the price for making a last-minute deal is showing signs of renewed vigor. Spot rates bottomed out in February of this year at about 34% lower than the same time of the prior year and they've steadily climbed to about negative 15% year-over-year. So, they've cut their margin in half.

There’s an important related phenomenon to consider: a decline in contract rates. In every previous freight market cycle, spot and contract year-over-year rate changes had to intersect before the market entered its next cycle and that's happening right now.

All signs, then, point to a pending market flip. The analysts at DAT expect the market to tighten considerably in the fourth quarter of this year, then flip in the first quarter of 2024.

Higher Capacity

Understanding the present shift requires revisiting last year's downward pricing pressure. A drop in spot rates typically means more capacity is coming into the market, there are more trucks than loads available.

And why more trucks? Because more carriers entered the market during the pandemic. And that upsurge in players was caused by three forces. First, windfalls from government assistance supercharged new enterprise growth. Second, consumers started buying more stuff, much of which came from e-commerce websites, and all of that had to be delivered by truck. Third, lower diesel prices made it easier to rack up profits with a truck.

It all came together to create a healthy operating environment for carriers, sparking an upsurge in the number of trucks on the nation’s highways. Now, though, things are changing. The economy’s post-surge decline in demand has led to the aforementioned spot rate decline that now challenges truckers’ very survival. Rates have been dropping in an environment in which carriers are paying a lot more for used trucks, diesel and insurance. Trucking companies cannot support themselves on what’s coming in, noting that costs now largely soak up the dollars truckers are receiving.

Little wonder there has been an exit of carriers. We have gotten to a point of market equilibrium where rates roughly reflect the demand levels on the available trucks, Right now, capacity is dropping faster than the decline in demand that has come about by the rise in interest rates and fears of recession. The data shows that we are at an inflection point where shipping rates will start to increase as volumes pick up.

Get Ready for Change

While they still have some operating leverage, shippers should start preparing for the market turn. The best thing a shipper can do while it's sunny out is to make sure the roof is fixed, Shippers need to keep in mind that while they may be getting good gains now, they will pay the price when the market turns. So now is the time to strengthen relationships with asset-based carriers as well as brokerages, so they will be on your side when things change.

One way to strengthen relationships is to reinforce arrangements with incumbents. Now’s not the time to shuffle a shipper’s carrier base, similar to managing a portfolio of investments, shippers should arrange for the right mix of transportation relationships. Some carriers will have trucks dedicated to a shipper for specific lanes; others will be set with contracts, and still others will be used for dynamic or spot shipments.

Some moderation in financial arm twisting is also in order. How you treat your carriers now is how the carriers will treat you later .Even the big carriers are struggling a bit right now. When the market turns, the natural inclination will be to return whatever pain you have caused them. If you were driving down their rates on certain lanes, expect prices to come back up.

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