Index-based freight contracts may shift risks to BCOs, raising concerns among shippers about their true value in volatile markets.
Index-based freight contracts are being promoted as a modern solution to volatile shipping markets, but many shippers warn they transfer risk to beneficial cargo owners rather than create value, reports Singapore's Splash 247.
Raymon Krishnan, president of Singapore's Logistics & Supply Chain Management Society, stated that indexing emerged as carriers moved away from fixed-rate contracts following the Global Financial Crisis and pandemic shocks. With the top 10 carriers controlling 85 percent of global capacity, they were able to push index-linked models as a condition of access.
Freight indexes such as the SCFI and Xeneta provide data that appears objective; however, Dr. Krishnan argued that they are built on volatile spot market rates, creating mismatches for BCOs who plan on annual budgets. Rates rise quickly when markets spike, but relief is slower when they soften.
He noted that carriers benefit from pass-through pricing during disruptions, while shippers absorb volatility without protection on service levels. Cargo rollovers and blank sailings rarely trigger contractual consequences, leaving BCOs exposed.
Dr. Krishnan suggested that indexing can be useful in tactical lanes if contracts include safeguards such as rate ceilings, floors, and service-linked adjustments. He emphasized that resilience requires contracts that align incentives and recognize volatility as permanent, with hybrid pricing and risk-sharing mechanisms offering a more strategic path forward.
