Consolidation’s impact on price discovery

The Fed and some others perceive that over-heated physical friction in supply chains is being gradually worked out. Demand has been seriously disrupted and diverted. As — if? — demand settles — sources, channels, and modes of supply will catch up.

From this angle, recent price hikes help demand determine what is really needed/wanted, when and where. As demand becomes less volatile and supply more elastic, surging prices will soften. Ergo, this argument goes, the current sharp swing toward inflation is transitory.

This will often be true. Push typically knows its limitations. Both time and space are uncompromising task-masters. Fixed costs are almost as clear, if treacherously less rigid. With high-quality customers, push does not want to seem mercenary. In any case, pre-existing contracts often set upper limits. The highest prices now being paid for scarce unclaimed capacity are imposed on smaller players or newbies. This is how suppliers and carriers assess the potential value of otherwise obscure pull-signals. High volume, high velocity networks have a tendency to shed suboptimal demand. But if more space opens up or velocity can be increased, available push will accommodate additional pull, re-optimizing to changing conditions.

The big question: in the next several months will this accommodation reflect prices increasing at a slower rate or more stable pricing or reduced pricing? Pandemic price increases will be more stubborn when and where push is capacity constrained, increasing capacity is expensive and time-consuming, and barriers to entry by new competitors are high. This is the case with ocean and rail shipping (more and more). The US trucking market is much more price pliable. Consolidation of capacity is a crucial differentiator between these three freight modalities.

Three ocean freight alliances carry over 80 percent of maritime container shipments. Four US railways account for over 80 percent of industry revenue. In contrast the top ten long-distance trucking firms carry less than ten percent of long-distance US freight (more and more). At the close of 2020 there were over 150,000 trucking firms of all types operating in the United States.

Big players can and need to be strategic. Smaller players often are (and need to be) opportunistic. A market dominated by strategists seeks predictability. Strategists are reluctant to forsake an advantage once secured. A market where no player or set of players dominate is less predictable, much more inclined to facilitate steady or falling prices.

For the remainder of this year, we will see both behaviors playing out — responding to both economic fundamentals and regulatory threats. Once the current catch-up and Christmas are completed we will have a much clearer sense of core capacity, constraints, and competitive agilities. The most resilient demand and supply networks are diverse. By March 2022 (or before) we should have the results of real-world stress tests highlighting where our networks enjoy diversity dividends and suffer diversity deficits.