In the current volatile freight rate environment on the major east-west trade lanes, shippers and carriers are slowly beginning to negotiate long-term contracts linked to various rate indices, but they won’t solve the problem of volatility until carriers can find innovative solutions to the problems besetting their business.

That was the conclusion drawn by different members of a panel on the first day of Containerisation International’s 14th annual Global Liner Shipping Conference in London Tuesday.

Michael Rainsford, a freight trader with Morgan Stanley in London, said the indices of spot rates are already driving annual contract rate negotiations. “We question whether contract rates are fixed in such a volatile environment.” He said carriers are already forcing shippers to reopen their contracts when rates plummet, and shippers are making carriers reopen contracts when rates soar, so why not negotiate long-term contracts with rates that are indexed?
“Because spot rates in the Asia-Europe trade are already 3 ½ times higher than contract rates, we will see upward pressure on contract rates, because otherwise carriers won’t move their cargo,” said Martin Dixon, research manager of Drewry’s Freight Rate Insight. He said freight contracts have been broken repeatedly over the last three years as rates go up and down.

Dixon also said the ownership structure of container lines is stifling the industry, because owners continue to support inefficient carriers. “Those carriers that don’t innovate should be allowed to fail.”
Drewry’s surveys have shown a strong trend by beneficial cargo owners and freight forwarders toward adopting indexed contracts. Rainsford predicted indexed contracts would grow rapidly because both shippers and non-vessel-owning common carriers have a “growing appetite” for them. He said indexed contracts enable carriers to differentiate themselves based on service rather than price.

Another panelist, Christine Cabau Woehrel, CEO of the Port of Dunkirk, France, suggested cost-plus contracts between shippers and carriers might be a better solution, with contracts at fixed freight rates with reopeners as carrier costs rise.

But other panelists rejected her suggestion. “Going to cost-plus contracts removes carriers’ incentives to keep their costs under control,” said Jeff Drake, director of AlixPartners. “It’s a huge step backward.”

“I don’t think cost-plus is the way to go,” Dixon said. “Using cost-plus contracts fights the markets. It removes efficiency based on competition.”
Source: The Journal of Commerce