LONG BEACH, California — A cargo-booking exchange platform designed to increase certainty and accountability in the container market is set to move from pilot phase to a full launch in June.
The New York Shipping Exchange is midway through a testing period to refine the online portal, through which carrier cargo space can be booked and which also monitors whether the booking is fulfilled by shipper and carrier, the company said at JOC’s 17th Annual TPM Conference in Long Beach Wednesday.
The exchange targets the much-discussed problem that although shipper-carrier contracts may be signed, parties frequently fail to comply with the deal, breaking it with no fear of consequence because such contracts are rarely enforced. For example, some shippers commit to move cargo with a carrier, but do not send the cargo and it is often because the shipper has found a cheaper deal. Similarly, carriers commit to carrying cargo on a particular ship, but leave it on the dock and it is often to put more lucrative shipments on board, if they haven’t canceled the sailing entirely.
Such behaviors create uncertainty in the marketplace, generate waste, and needlessly push up the cost of shipping, officials and supporters of the New York Shipping Exchange said at a case study panel on the portal at the TPM conference.
“The exchange is ultimately a mechanism to ensure that these contracts are settled,” said Gordon Downes, CEO of the exchange and a former Maersk Line executive. Key to solving the problem, he said, are exchange requirements that shippers that make a booking put up a security that is partially forfeited if the cargo is not sent, and penalties for carriers that don’t ship cargo as agreed.
“Securing of these contracts is a way that everyone is kept honest because everyone is financially incentivized to follow through on the contracts,” he said.
Michael Ehrlich, a professor of finance and economics at the New Jersey Institute of Technology, estimates the overall cost to carriers and shipper of broken contracts is about $23 billion a year.
That total stems in part from carrier under-utilization due to booked cargo that shippers never send to the dock, and excessive inventories amassed by shippers to cope with uncertainty over when goods will arrive, he said. Another contributor is the cost of liner sailings canceled because insufficient cargo arrived in time for departure, said Ehrlich, who studied the issue in 2015 and now supports the New York Shipping Exchange.
“Is this a failed market?” Ehrlich told the case study presentation at TPM. “Yes. But it’s not because of oversupply .… What we see in this industry is terrible incentive structures that lead people to behave badly. Shippers have this terrible incentive to overbook and fail to produce the containers they have promised. And there are [at present] no penalties for them doing so.” In addition, carriers overbook ships because they don’t know exactly how much cargo will appear and if they subsequently have too much, they leave some on the dock, he said.
Carriers that use the web-based New York Shipping Exchange portal to accept bookings post specific details about a cargo movement they are willing to make — including the origin and destination, the number of containers to be moved, and the price of the move. Shippers can then commit to sending cargo under the deal, and are required to back up their commitment with a bond, cash deposit, or insurance policy.
If the shipper fails to send the cargo, it forfeits between 30 to 40 percent of the agreed shipping cost, depending on the route. A similar penalty is levied on the carrier if it fails to complete the delivery.
As well as providing the platform through which the deal is made, the exchange — which charges $5 per 20-foot-equivalent unit for its service — is responsible for monitoring whether a shipment is completed, and if not, who was at fault.
The only excuse for failing to complete a contract is “force majeure,” or extreme natural or other accidents, and those cases will be decided by the Society of Maritime Arbitrators in New York, said Downes. However, a shipper that cannot fulfill a contract can look for another company to take it up, he said.
“The hypothesis is that if you can make enforceable contracts, you completely reverse the vicious cycle that we are stuck into today,” he said. “You can get to a point where a shipper knows exactly how much capacity he or she can get on a vessel. The shipper can lock that capacity in with the carrier. The carrier can trust that the shipper is going to show up with the cargo .… And that cascades directly into better network planning for the carrier, and of course better supply chain management for the shipper.”
Downes said the company has had extensive discussions with many carriers, and about half of the top 10 carriers “have embraced it.” The exchange won’t be their sole method of booking cargo, but will be an option that exchange officials hope will grow in importance as carriers and shippers see how it works, and a critical mass of users develops, Downes said.
Tom Smart, vice president at MOL (America) and backs the exchange, said it gives carriers flexibility to manage cargo. He demonstrated the problem with sample data for a “typical week” that showed that on 14 sailings studied by the carrier between 17 percent and 52 percent of the cargo on the bookings made hadn’t materialized four days before the ship sailed.
“There is no penalty for this fall down … I just have to manage it,” he said.
Moreover, the exchange enables carriers to use “dynamic pricing,” varying the price of a movement, to ensure the ship sails full, he said. “If I am getting close to the sailing, and I need more freight, I want to incent cargo — so I will lower the rate,” he said. But if the sailing date is near and the ship has little room, the rate can be increased, he said.
Bjorn Vang Jensen, vice president of Global Logistics at Electrolux, said the exchange provides the answer to a problem that shippers and carriers have long known, but still remains unresolved.
“We’ve had this conversation for the 30 years that I have spent in this business,” said Jensen, adding that the exchange is the first effort he has seen to get to the roots of the shippers concerns about the issue.
“It really is about security, certainty of service,” he said.