The Logistics Manager’s Index (LMI) for December indicated that overall inventory levels were flat compared to November, signaling that companies effectively forecasted demand for the holiday season. However, a deeper analysis reveals a significant disparity between upstream and downstream inventory levels, suggesting notable freight movement opportunities for early 2025.
Divergence Between Upstream and Downstream Inventory
The LMI showed that upstream inventory levels, associated with warehousing finished goods that are not expected to be sold in the near future, grew moderately in December, with a reading of 57.9. In contrast, downstream facilities, which are closer to the end consumer and are more focused on distribution or fulfillment, showed a much lower reading of 33.9. This stark difference suggests that downstream companies were likely able to meet demand for the holiday season, while upstream firms might have over-ordered, possibly due to concerns like tariffs or other supply chain uncertainties.
As a result, it’s expected that many downstream firms will focus on replenishing their inventories in early 2025, leading to continued demand for freight movement, especially for distribution and fulfillment centers.
Cost Control and Warehouse Pricing
While some may argue that retailers are cutting back on inventory to reduce warehousing costs, this seems less likely to be the main driver. The warehouse pricing component of the LMI has remained stable, and distribution centers are expensive to operate, regardless of inventory volume. More importantly, understocking could be more costly in terms of lost sales opportunities, especially if consumer demand continues to rise.
Interestingly, container booking volumes for U.S. imports, as tracked by the Inbound Ocean TEUs Volume Index (IOTI), have held steady, with slight increases recently due to the earlier timing of the Lunar New Year. This suggests that imports are not slowing significantly, further supporting the idea that inventory replenishment and freight demand are likely to remain strong.
Strength in Intermodal Transportation
Intermodal transportation, particularly rail, is expected to experience continued strength into 2025. Since last summer, demand for intermodal containers has surged, driven by factors like lower costs and longer order lead times for upstream warehouses. For example, rail volumes of loaded international and domestic containers out of Los Angeles have seen a 20% year-over-year increase. However, truckload providers have not seen similar growth, especially for long-haul freight. Truckload demand for freight moving less than 100 miles increased by 13% in December, indicating a reliance on rail for longer distances and trucks for the shorter, final-leg deliveries.
This trend suggests that intermodal providers will likely remain busy throughout the first half of 2025, with truckload providers facing a more mixed outlook as freight patterns continue to evolve.
Freight Market Outlook
The ongoing consumer spending and demand for goods are positive signs for the transportation sector. While market conditions remain dynamic and uneven, the shift toward intermodal transportation and the continued need for inventory replenishment will likely provide strong demand for freight movement well into 2025. The transition within the truckload market, particularly the loss of market share to rail, has helped reduce excess capacity, which may contribute to the first signs of long-term rate inflation for truckload contracts since 2022.
In summary, while the supply chain environment remains complex, the demand for freight services—particularly in intermodal transport and inventory replenishment—is expected to remain robust. Early 2025 is shaping up to be a period of significant freight movement as companies balance supply and demand fluctuations, highlighting opportunities in both upstream and downstream logistics.
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