Making Market Adjustments

Making Market Adjustments

In the world of container shipping contracts, 18 months can seem like an eternity. But Michelin has started signing such agreements as part of a new approach to carrier-shipper relationships the tire manufacturer would like to see spread across the maritime industry.

“There is a need for a new business model,” said Jean-Louis Cambon, head of the ocean management committee at Michelin. “There must be a radical change in the mindset of the business.”

Cambon’s plea was at the heart of deep agreement among carriers and shippers at the 13th Annual Global Liner Shipping Conference hosted in London last week by Containerisation International, agreement that contrasted sharply with the rancor that spread through the business during the 2008-09 recession. With economic recovery providing some equilibrium and distance from the downturn, the focus on better ways of doing business came with more than a few areas of common ground.

That was especially true in what shippers and carriers said remains a search for reduced rate volatility, a goal growing more urgent as the push grows for longer-term contracts that span several cycles and carry significant risks across the supply chain.

“Volatility has always been a part of container shipping, but we can reduce it,” Cambon said.

Reducing rate volatility is central to the carrier’s goal of serving the world’s largest shippers with dependable service that fits complicated global supply chains, said Nicolas Sartini, senior vice president for Asia-Europe trade at CMA CGM.

“We are more than a single commodity reduced to a single price,” Sartini said. “The shipping container market is much more complicated than that, than moving goods from one port to another.”

CMA CGM came close to collapse during the downturn, in part because of speculative oil trading by its owners that weighed down the French container line, the world’s third-largest carrier by capacity, with heavy debt. Profitable last year and helped by fresh equity investment, CMA CGM is focusing on longer-term contracts that Sartini says fit better with modern supply chains.

“The primary concern for shippers is that the supply chain works,” he said. “When we discuss with customers what they believe is important, they tell us: stable and fair pricing; safe and reliable transportation; more want clean transportation; efficient and proactive information systems; and simplicity and accuracy in invoicing.

“A fair price for them usually means a competitive price, not the lowest price, but one that is in line with what their fellow customers in a particular field are paying,” Sartini said.

Longer contracts, he said, would include a range of commitments and performance measures. They also would take into account shifting market prices through what he called a Market Adjustment Factor, or MAF. “We will come up with a better name,” he promises.

In its broad outlines, the CMA CGM mechanism resembles currency, fuel and rate tools other shippers and carriers have suggested. Price would be fixed for a longer period, perhaps two or three years. It doesn’t change as long as it remains within a “trigger” range that is agreed with the customer.

Outside the trigger, he said, the price mechanism would operate inside a “tunnel” showing the maximum rate a shipper will pay under the contract and the minimum a carrier would get if rates decline.

“This is a concept we are introducing,” Sartini said. “It is being well received by our customers. They have been seeking some stability, and over time we will see how it does. We are discussing this regularly with our customers, and it is meeting with some success.”

He would not say whether that success has yielded specific contracts, but there clearly is no agreement yet on what measurements, exactly, would trigger changes. The market price, he said, could be the carrier view, the shipper view, an index or “a combination of these three.”

A carrier and shipper also would agree, he said, on performance measures, specific protections, an adjustable bunker charge, the MAF and a broader structure for promised services from the carrier and commitments from the shipper.

But several shippers said the onus was hardly on the carriers alone, and they suggested volume commitments would be tough to make for their businesses.

“Everybody uses words such as commitment, but these are very heavy words,” said C.F. Pardou, strategic sourcing adviser for supply chain and logistics at ExxonMobil. “As a big shipper, we have an aversion to a lot of commitments … As long as the volumes are not predictable, then you have to concede the carriers are within their rights to change their services.”

That’s because shippers managing supply chains must maintain flexibility to meet their own market demands by switching sourcing locations for raw materials or for goods from factories, Pardou and other shippers said.

Paul Page is executive director of The Journal of Commerce. He can be contacted at 202-355-1170, or at ppage@joc.com. Follow Paul Page on Twitter, www.twitter.com/paulpage.