The Intermodal market has faced unprecedented volatility and supply-side shortages for the past nineteen months. Many of the challenges facing the industry were well-publicized and could be categorized as five distinct, albeit deeply connected, issues:
Intermodal started the year strong, with both International and Domestic volumes at elevated levels. Demand was high and volumes were up over 20% from the previous year. It seemed that, although we could anticipate some congestion and fluidity issues, the overall ability for U.S. rail networks to weather the storm would be improved when compared to 2020. Consumer purchasing patterns continued to lean heavily towards the finished goods and retail sectors, while service spending remained heavily suppressed thanks to regional lockdowns and travel restrictions.
As Asia’s production reemerged from the lows of the pandemic lockdown, a wave of imported goods started to pour into North America. More import containers led to more transload activity and more domestic equipment piling into coastal transloads. The sheer volume of import activity strained an already tight market for truck drivers and warehouse workers. As a consequence, equipment sat idle for long periods and led to soaring storage costs and high over-the-road pricing to expedite shipments. All this at a time where labor pools were still depleted, competition increased from other sectors, and the virus itself interfered with productivity.
It’s key to note that congested rail networks negatively impact drayage drivers, who operate the trucks that pickup and deliver containers from Intermodal rail yards and ports. Simply put, highly congested railways and ports mean more idle time and lower earnings for them, while their peers on the long haul trucking side are making considerably more money. This led, in part, to a chronic shortage of intermodal truck drivers , a shortage that still persists today. This confluence of factors has led to sequential decreases in railway handlings across North America — a far cry from where Intermodal was in Q2 of 2021.
While NFI is unable to change the macro landscape, we have partnered with our customers, drayage carriers, and the railroads to ensure that rail shippers still gain the capacity they need during these times of supply chain disruption. This is a business where scale, relationships, and reputation mean everything and through our long-standing relationships with Class 1 railways, the drayage drivers who serve those railways, and the shipping community, we’ve managed to ensure that essential goods remain in-stock at retailers, restaurants, and grocery stores.
As we look ahead to 2022, we expect retail inventories to stabilize as consumer spending decreases following the holiday season. Additionally, the period between the seasonal reduction in consumer spending in January and the lunar new year shutdowns in China will allow some links of the supply chain to recover. Also, the heightened focus on supply chain we see in the mainstream media extends well beyond headlines; it reverberates throughout every level of government. We are starting to have conversations about reductions in red tape and a slowing of regressive legislation. While specific outcomes remain somewhat unclear, a more permissive regulatory climate coupled with a cooldown in port and rail congestion will allow Intermodal to start repairing some of the reputational damage incurred in 2021.
As constrained Intermodal capacity starts to return to the market, expect to pay more due to the inflationary pressures on fuel, infrastructure, and labor. Cost of capital is also sure to rise in the coming fiscal quarters as a result of the pressure central banks are feeling to control inflation. This will lead to some hesitancy on the part of truck, chassis, and container fleet owners to invest capital into hard assets unless there is a significant return on that investment. High-single-digit price increases to Intermodal contract rates are expected to be a reality for shippers in 2022, and that comes on the heels of extremely high prices for domestic Intermodal transportation in 2021. Thankfully for Intermodal users, rail will still trade at a substantial discount to OTR trucking service in many significant freight corridors across North America. Working with a partner who can provide flexible, multimodal solutions remains the most effective way to navigate supply chain congestion into 2022.
Mark McKendry, Regional Vice President of Intermodal at NFI, is responsible for NFI’s asset and non-asset intermodal sales and operations teams across North America. Mark and his team are experienced in domestic and cross-border intermodal solutions.