The German Paradox: Why Spot Prices Mark a New Peak Despite a Softened Economy
Week - 18 - Insights and projections for the German road spot market
Despite Germany's experiencing a prolonged downturn over the past two years, a situation that typically leads to lower transport prices, the reality is different. Market participants are taken aback by the high quotes for urgent spot shipments within Germany. This article will explore the current market sentiment, unravel this apparent paradox, and provide expectations for the weeks ahead.
The accompanying graph shows the trajectory of spot prices, spot offers, and inverted contract rejection rates for domestic road transportation in Germany over the past three years. For a comprehensive understanding of these metrics, please refer to previous Market Monday articles that delve into these KPIs.
Recently, spot prices in Germany surpassed the 2022 peak level (red line), reaching a new all-time high. This development is particularly intriguing given the near-record low business confidence and economic activity in this region of Europe. What causes this paradox, and which factors are at play?
While overarching demand can be ruled out, how does subdued demand result in such elevated prices? The primary driver is the reduced available capacity, especially in Western European markets, as evidenced by contracted rejections (yellow line). The reasons for this constrained capacity are multifaceted, with current rather low contracted price levels significantly contributing to high rejection rates. Shippers' procurement departments, under pressure to cut costs in the current challenging economic environment, often resort to higher-risk allocations to reduce overall transport expenses. This precarious strategy leads to increases in rejections, which, during peak periods, force urgent spot market usage and its associated price penalties.
Conversely, carriers are grappling with business losses and the threats of bankruptcy, leading often to fleet reductions and driver layoffs. The spot market nowadays, particularly during cyclical peak times remains the only segment where cost coverage or margins can be achieved. Consequently, carriers are forced with their assets to overweight the spot market by declining contracted transports above the minimum agreed, a less preferred and sustainable business model. The results are higher rejections and a self-reinforcing cycle only possible in periods of overall capacity shortage and short-term demand peaks.
In essence, the market faces a delicate balance. When demand increases, capacity constraints emerge due to driver shortages, market transformation, and ongoing uncertainties.
In my view, Germany particularly exemplifies this paradox described and, along with France, will likely face the most severe impacts. I envision that spot price levels in Germany have not reached their zenith yet during this year's public holiday season, potentially rising up to 5 additional index points increase in the weeks ahead.
Christian Dolderer
Lead Research Analyst
Trimble Transportation (Transporeon)