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 wonâ€™t solve the problem of volatility until carriers can find innovative solutions to the problems besetting their business. Thursday, 19.Apr.2012, 01:36 (GMT+3)
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 wonâ€™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 Internationalâ€™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. â€śWe question whether contract rates are fixed in such a volatile environment.â€ť 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? â€śBecause spot rates in the Asia-Europe trade are already 3 Â˝ times higher than contract rates, we will see upward pressure on contract rates, because otherwise carriers wonâ€™t move their cargo,â€ť said Martin Dixon, research manager of Drewryâ€™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. â€śThose carriers that donâ€™t innovate should be allowed to fail.â€ť Drewryâ€™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 â€śgrowing appetiteâ€ť 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. â€śGoing to cost-plus contracts removes carriersâ€™ incentives to keep their costs under control,â€ť said Jeff Drake, director of AlixPartners. â€śItâ€™s a huge step backward.â€ť
â€śI donâ€™t think cost-plus is the way to go,â€ť Dixon said. â€śUsing cost-plus contracts fights the markets. It removes efficiency based on competition.â€ť Source: The Journal of Commerce