An Arctic polar vortex is headed East after blasting areas of the Midwest and Southern U.S. with bone-chilling weather and record deep freezes in Texas and Oklahoma, where millions lost power. The massive weather event is also impacting already stretched freight networks and pushing up spot rates at a time when rates would typically drop off.
This event is reminiscent of the 2014 polar vortex, which started a “rate rally” in 2014, noted Dean Croke, DAT’s principal industry analyst. Similar to today, in 2014, the weather caused significant rate increases and delayed the loading and unloading of freight, as equipment and machines broke, railroad tracks froze, and ports closed.
The 2021 polar vortex has already pushed up spot rates by about 5 cents per mile this week, according to DAT. Normally, rates would begin dropping off through the first quarter and then start to pick up through spring and summer.
This year’s polar vortex looks like it will be limited to one week; however, the effect on the freight market will likely be felt for weeks to come.
“I think next week [rates] will go even higher again as a result of this week’s freight network disruptions where a lot of carriers are shutting down terminals, truck stops are shutting down and trucks can’t get fuel, and drivers slowed down or are stopped on the roads,” Croke told FleetOwner. “All that has a combined effect of crippling capacity, and that will mean there will be more volume in the spot market as shippers scramble to replenish. That will drive up spot rates even more like it did in 2014.”
In 2014, rates increased 12% as a result of the polar vortex, Croke pointed out. Heading into March and the spring shipping season, Croke expects this year’s event, which in addition to market ramifications from the pandemic, will put even more upward pressure on rates now through the middle of the year.
“This is such an unusual freight market because of the pandemic as volumes are up for some products and other volumes are down,” Croke explained. “If you think about the refrigerated market, typically, rates drop dramatically from Christmas through April, and then they start to pick up when the produce season comes online down in Florida.”
This year, however, produce volumes are down 30% year over year because the service industry isn’t ordering as much. But the demand for insulated equipment has increased the need for refrigerated trucks in the last two weeks to keep dry freight from freezing.
General conditions and outlook
Since the start of the pandemic, the spot market has been outpacing the overall freight market because the spot market thrives on disruption, noted Avery Vise, vice president of trucking for FTR Transportation Intelligence.
During FTR’s recent "State of Freight: Trucking Outlook" webinar, Vise pointed out that total spot volumes are the strongest ever and that total volume is more than double what it was a year ago.
“Spot rates in dry van entered 2020 at a record level before dropping sharply; however, they’ve recently been moving higher, and they have been doing so counter to seasonal expectations,” Vise said.
At the start of February, however, for the first time in seven months spot rates dropped below contract rates, which were lagging by about 14 cents per mile, DAT’s Croke said, adding that spot rates in dry van and refrigerated are now about the same.
Flatbed rates, on the other hand, have declined, but the segment has surpassed 2018 records when it comes to volume levels, keeping rates above 2019 levels. In 2018, flatbed rates saw an abnormal hike because of a boon in the industrial economy and an investment in fracking. Those high spot rates drove up contract rates going into 2019.
“The pandemic has driven more people to work from home, and it created this urban flight to rural communities, and it pushed up the development of single-family homes that are more tech-enabled to allow people to work from home,” Croke explained. “The pandemic and people working from home has meant that people feel more comfortable living in rural areas right now, and that’s driving more demand for single-family homes.”
Single-family housing starts are up 29% year over year, while the price of lumber is up 12% year over year. The flatbed industry has been particularly busy during the pandemic because of the demand for building materials and lumber.
“Flatbed was the last of three segments to surpass 2018 records on volume levels,” Vise said. “Flatbed is a segment that has considerable upside potential. We aren’t seeing any softening in residential construction anytime soon, and manufacturing seems to be recovering steadily.”
Broader trends and risks
Although the freight market has appeared to recover, driver capacity has not. So, active utilization is higher for carriers hauling the same amount of freight with fewer drivers.
“During the back half of 2018 and into 2019, we saw a rather rapid softening of utilization because fleets were successful recruiting new drivers, which they spent a lot of money and time doing in 2018,” FTR’s Vise said. “We don’t see that happening this fast this time, given the strains peculiar to the pandemic.”
One strain on driver capacity is a large number of presumable retirements or career changes since COVID struck. Another is the sharp reduction in newly trained and licensed CDL holders due to disruptions at truck driving schools and state driver licensing agencies.
“That constricted pipeline might start to open up as the pandemic fades, but there is a backlog of demand there, and of course, we have the Drug & Alcohol Clearinghouse, which already has removed more than 45,000 truck drivers from the system so far, and that number goes up basically every day,” Vise explained.
According to DAT’s Croke, because carriers don’t know where demand is going, they have been more reluctant to add too much driver capacity as they did in 2018.
Vise also pointed to data over the last nine years that shows a transition to an older trucking workforce. The median age of trucking’s workforce is 47.2 compared to the rest of the U.S. workforce, which is 42.5, he said.
Another area to watch is from Q3 and Q4 2020 when trucking saw an unprecedented increase in the number of new carriers entering the market, Vise explained.
“A lot of those companies probably came from the ranks of leased owner-operators and for-hire carriers,” he said. “It represents a diversion of capacity, not really an increase of capacity. We saw a big drop in purchased transportation along the big publicly traded truckload carriers, so it makes sense that would happen.”
Vise surmised that many leased owner-operators who lost business in Q2 saw an attractive spot market, and with an opportunity to dip into the federal Paycheck Protection Program, they went out and got their own authority.
“We track revocations of trucking authority, and I link that directly to specific trucking companies that are in business or not,” Vise explained. “I look at revocations as a good proxy of what’s happening in the market. We just don’t see evidence of a big surge in failures.”
That said, increasing diesel prices could potentially drain small carriers of cash. But with freight rates so high, Vise doesn’t see that as a major concern.
According to DAT’s most recent Pulse Signal Report, the market is expected to follow historical trends, with contract rates lagging the spot market by several months and likely peaking in Q2 this year. The major economic factors impacting freight in 2021 will likely be vaccine distribution, consumer spending, fuel prices, driver employment, and dwell and detention time.
