Contract Terms

The recently ended contracting cycle in the eastbound trans-Pacific shipping market certainly will be remembered for how little if at all ocean container carriers were able to gain rate increases in what for them became a surprisingly unfavorable negotiating environment.

After last year’s world of tight capacity and carrier unity in slow-steaming and vessel idling, which allowed the lines to recover rapidly from the depths of the financial crisis, shippers were hardly expecting to have the upper hand this spring. But they did.

That’s why the impact of this year’s ocean contracting season echoed across inbound and outbound supply chains beyond the simple matter of rates. It’s why, for instance, despite all the thundering from carriers that they were finally getting out of the chassis business in the U.S., only a handful of carriers actually held firm and achieved that landmark concession in service contract negotiations.

Still, we understand many inserted into the fine print their right to discontinue chassis provision later in the year, something shippers will need to watch if the market turns in the carriers’ favor during the peak season.

Beyond the scarcity of true rate increases, other elements generally were missing from contracts that might have signaled a positive shift in relationships between carriers and their customers.

Many people at this year’s Journal of Commerce Trans-Pacific Maritime Conference in Long Beach, Calif., talked about the need to improve the business climate, but one would be hard-pressed to find much evidence of such good intentions in this year’s contracting season.

One such element would be the enactment of multi-year clauses. Despite obvious benefits for both sides in getting away from the massively time-consuming and agonizing yearly tendering process, it appears from talks with carriers and shippers alike that very few of the thousands of contracts signed can be considered multiyear.

Carriers encourage shippers to sign multiyear contracts. It would save time and headaches, after all, to get away from the annual tendering process, and carriers would like to lock in volumes and solidify relationships with important customers.

For the shipper, the benefits are arguably greater. The tendering process is just as onerous for supply chain managers, taking time away from day-to-day management of transportation, a full-time job in itself. Any retailer or manufacturer wants its shipping costs to be competitive with its peers in its own markets. But companies also want stability, to know their costs beyond just the near term. Given the lengthy planning cycle for new products and future selling seasons, clarity on transportation costs for only a single year is inadequate for many organizations.

Yet unpredictability is precisely what has kept long-term contracts in the ocean sector to a minimum. There is too much risk for both sides in locking in rates for more than a year. The typical one-year contract in the trans-Pacific market is long globally speaking; in the Asia-Europe market, rates generally are determined quarterly.

But although few long-term contracts were signed this year, the scenario could be changing. If each side truly wants to get away from the annual tender, it’s possible to lock in a service contract for multiple years and allow rates to fluctuate. To do that effectively, you need an independent freight rate benchmark, which until recently didn’t really exist. Since 2009, however, two indexes have been introduced: the Shanghai Shipping Exchange’s Shanghai Container Freight Index, or SCFI, and a Container Trade Statistics index. And Drewry Shipping Consultants and freight exchange Cleartrade recently announced a new index to be released this summer.

The SCFI is the basis for derivatives trading, a method for shippers and carriers to minimize rate risks in head-haul freight. Use of the index for derivatives has been limited. The CTS index, based on freight rate data carriers were allowed to aggregate and publish following the 2008 elimination of the bloc exemption in Europe, is gaining some traction. Maersk used the CTS index for some long-term contracts this year, indicating it preferred it to the SCFI because Maersk believes it’s less volatile; the CTS data contains service contract volumes, while the SCFI is purely a spot market index.

In a speech at a liner shipping conference this spring, a senior CMA CGM executive described the company’s use of internal pricing benchmarks in introducing flexible rates into service contracts. The Drewry-Cleartrade index also will be based on the spot market, but, unlike the SCFI, it will contain backhaul rates, so should be more attractive to commodity shippers.

The bottom line is the growing presence of container rate indexes has the potential to break the logjam of long-term contracts. That can only help the industry by allowing both the shipper and carrier to focus on improving the operational aspects of their relationship.

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. Contact him at, and follow him at

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