North Atlantic Alliance Association

North Atlantic Alliance Association

Is the pendulum of ocean contracts swinging the other way?

The Ocean Shipping Reform Act of 1998 transformed ocean shipping pricing from common carriage (tariff) to contract carriage. This 180-degree shift hasn’t been all smooth sailing and may be in the process of reversing course in the direction of common carriage over the coming years.

The complexity of ocean pricing has morphed over the years, making the sheer management of contract rates a monumental undertaking. The turbulent and frequent fluctuations in rates are moving faster than a ticker tape on Wall Street.

Ocean carriers take on the brunt of costs for filing contracts, coupled with the liability of running afoul of the Federal Maritime Commission, which has a history of imposing large fines against these same lines. Contract carriage has become a costly undertaking that at times can outweigh the benefits of having a contract. These costs lead to lost productivity and opportunity costs add to expensive solutions that are proving too much to bear in today’s economic environment.

Carriers are testing the waters of reverting to spot or tariff rates through common carriage in lieu of contracts. Casting a wider net to attract cargo with limited costs in a declining market is becoming a necessity with increased capacity and a limited sales effort.

Spot rates play havoc with budgets and stability of cargo flow. Most direct shippers are ill-equipped to deal with erratic supply chain pricing and market instability, and will undoubtedly look to outsource the pricing to third-party logistics companies. Ocean transportation intermediaries possess extensive market knowledge, and react to changes at lightning speed compared to more static ocean lines. The ability to nimbly navigate between tariff and contract is on the horizon and will squarely fall in the wheelhouse of the OTI.