Multiyear contracts indexed to freight rates are slowly starting to catch on in global trade lanes as a means of creating stable and predictable rates for shippers and ocean carriers.
Despite their benefits, however, index-based contracts aren’t likely to become the new standard any time soon, according to a panel of shippers, carriers and intermediaries at The Journal of Commerce’s 12th Annual Trans-Pacific Maritime Conference.
“Is it for everybody? Probably not,” said Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, a discussion group among 15 carriers in the Asia-to-U.S. trade. “We see it as evolving, an evolutionary process, not revolutionary.”
The contracts, indexed to indices such as the Shanghai Shipping Exchange’s Shanghai Container Freight Index or Drewry’s Container Rate Benchmark for cargo on single trade lanes, are adjusted periodically based on the average of the indices over a period of time. They help carriers and shippers avoid the volatility that has plagued the industry during the stomach-wrenching rate cycles of the last few years, cycles that are getting shorter as vessel capacity in the market increases.
But multiyear contracts are a new way of doing business in an industry that is slow to adopt new business models. “It’s difficult to sell internally and externally,” said Bjorn Vang Jensen, vice president of global logistics at Electrolux. “Negotiating the first one was the most difficult contract I have ever had to negotiate.”
Shippers should start by picking a long-term carrier partner, said Jensen, adding, “You need to have someone you can trust,” He said all indices have flaws, so shippers should pick one that works best for them.
He said shippers should inform their management that they have negotiated some sort of safety mechanism into the contract that caps the potential for rate increases or decreases. “It has to be reciprocal,” protecting shippers against sharp rate increases and carriers against decreases, Jensen said.
Fifty multiyear index-based contracts have been filed with the Federal Maritime Commission, which last week ruled such contracts could be employed on U.S. trade lanes.