Forwarders and shippers appear to be increasingly favoring flexible contracts to cushion the impact of the high unpredictability of freight rates, according to Drewry Maritime Research.
Shipper interest in index-linked container contracts (ILCCs) has increased significantly during the past 12 months, it noted. “Most of the top 10 global forwarders now have quarterly ILCCs with shipping lines, and the contracts are also becoming more interesting to medium-sized beneficial cargo owners.”
ILCCs’ attraction seems to derive from the need to simplify freight rate negotiations amid today’s high market rate volatility, since these contracts provide a good framework for long-term agreements. Drewry added: “In principle, carrier-customer relationships are also improved, and customers should get more freight rate stability, particularly where rates are reviewed every three months.”
It noted that spot freight rates on the Asia-Northern Europe trade lanes have been oscillating wildly since the middle of last year, rising 165 percent, 109 percent, and 56 percent within one week at the beginning of July, November, and the middle of December.
“It has put shippers in an impossible position,” said Drewry. “On the one hand, signing long-term fixed rate deals has become risky as far too much freight might be paid, and on the other, playing the spot market has become very unpredictable and time consuming.”
Only fixed long-term rates–usually the preserve of big shippers–and hedging avoid freight rate volatility completely, but ILCCs on their own can provide a half-way house, which can be achieved by the contracts incorporating freight rates that track the market.
ILCCS can help to reduce freight rate volatility depending on the period over which rates remain valid. “Quarterly reviews are better than monthly reviews, and both are better than playing the spot market on a weekly basis,” said Drewry.
Based on a survey conducted by the World Container Index, only 10 percent of beneficial cargo owners used ILCCs in the middle of last year, compared to 28 percent of forwarders and 38 percent of ocean carriers, “so there is much scope for improvement, even though change is in the air,” said the research group.
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