Contract Rates Stabilize on Shipper Expectations

The shipping industry has witnessed significant volatility in freight rates, particularly since the onset of the COVID-19 pandemic. However, recent trends indicate a stabilization of contract rates, driven largely by shipper expectations for future market conditions. This article explores the factors contributing to this stabilization and the role of shipper expectations in shaping the market.

The average dry van truckload contract rate trend (VCRPM1) has shifted to slight growth (+1.2%) over the past six months. While this may seem modest, it is a notable development in the surface transportation market, given the ongoing challenges and uncertainty. Rates are still down 2%-3% from an annual perspective but have shown signs of improvement since Q2, bucking the expectation of further decline.

The stabilization of contract rates can be attributed to several factors. Firstly, shipper expectations play a crucial role in this trend. As supply chain professionals anticipate a strong shift in the transportation market in the coming year, they are locking in long-term contracts to secure capacity and mitigate risks. The Logistics Managers’ Index (LMI) projects a significant increase in transportation pricing, from 58 to 76, over the next year. This expectation is driving shippers to secure favorable contract rates before the market tightens further.

Secondly, carrier negotiations and market dynamics are influencing the stabilization of contract rates. Carriers, holding a strong position in the market, are pushing levers to optimize their business. They are leveraging the current demand-supply imbalance to secure long-term contracts with favorable terms. This dynamic is evident in the exceptionally lopsided advantage shipping lines wield in 2022 negotiations for long-term contracts with cargo shippers.

Lastly, changes in demand and supply patterns are impacting the long-term stability of contract rates. Capacity is exiting the truckload environment at a rapid pace, with active operating authorities managed by the Federal Motor Carrier Safety Administration declining by 5% over the past year. This trend, coupled with the expected seasonal acceleration in the coming months, is putting upward pressure on contract rates.

To balance the risks and rewards associated with contract rate stabilization, shippers and carriers can employ various strategies. Shippers can focus on securing access to boxes and space on vessels, prioritizing supply chain reliability and stability. They can also keep contract durations to a maximum of 12 months, allowing for greater flexibility in response to market fluctuations. Carriers, on the other hand, can optimize their business by pushing levers in negotiations and leveraging the current market dynamics to secure favorable long-term contracts.

In conclusion, the stabilization of contract rates in the shipping industry is a result of shipper expectations for future market conditions, carrier negotiations, and market dynamics, as well as changes in demand and supply patterns. As the market continues to evolve, shippers and carriers must remain vigilant and adapt their strategies to balance the risks and rewards associated with contract rate stabilization.