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Index-Linked Contracts Could Curb Price Volatility in Ocean Freight Rates, Report Says

Shippers are increasingly frustrated with the current process of setting ocean freight rates, as evidenced by a new Freightos survey conducted across top-tier cargo and logistics providers.

“Legacy fixed price contracts dominate ocean freight pricing,” Freightos said in a report accompanying the survey results. “While prevalent, nearly every player recognizes their inherent flaws, making it incredibly difficult to plan ocean freight spend or ensure reliable, roll-free supply chains.”

Ocean rates remain one of the most volatile commodities, with strong seasonality but dominant fluctuations across peak seasons, according to Freightos, which operates a global digital platform for the shipping industry, helping importers and exporters reduce logistics costs and improve reliability. For example, recent China-U.S. West Coast peak season prices were as much as 68 percent higher in 2018 than 2017.

“The industry’s pricing volatility means that at any given moment either carriers or shippers have a strong incentive to break fixed contracts,” Freightos said.

In response, as the survey showed, companies are taking a serious look at index-linked contracts as a solution to price volatility. These allow the negotiation of annual or multiyear contracts without fixed prices, rewarding high volumes with lower index coefficients.

“In the past, fixed price tender negotiations may have been the best option to manage ocean pricing volatility, but in today’s world of accessible, credible data, it’s far from a suitable solution,” Freightos CEO Zvi Schreiber said. “With the current process, nobody wins and everyone knows it.”

Since 1985, the Baltic Dry Index has been the major hedging tool used by carriers to underpin forward freight agreements in an attempt to manage risk by trading forward positions. However, across many industries–oil, foreign currency exchange, soybean, corn, gold–U.S. companies have taken to using index-based pricing on $100 billion worth of products, Freightos said. This also includes industries similar to ocean container freight, such as oil tankers and dry bulk freight.

According to the survey, 80.6 percent of respondents said they work directly with carriers. On average, about 77 percent of shipments are moved by annual tender contracts compared to 10 percent moved on quarterly contracts and the remainder on spot rates.

During peak season, an average of 20 percent of shipments require additional fees and about 25 percent of logistics provider’s customer shipments fail to make the first available sailing. This results in 75 percent of logistics providers renegotiating or deviating from annual contracts with carriers to guarantee shipments make it onboard the right sailing.

As part of freight’s digitization, carriers and logistics providers are increasingly turning to freight technology to remove uncertainty and ensure that a fair market price is paid for service and on-time delivery, the report noted. For instance, CMA CGM now offers a two-way legal commitment for booking containers through Freightos, ensuring the slot and pricing, while the shipper guarantees payment, the report noted.

“What’s heartening about the results was that not only do logistics providers and [cargo operators] believe that adoption of index-linked contracts across the industry in five years is likely, a majority (57 percent) say it’s more likely than not that they themselves will be using index-linking,” Frieghtos said. “Like in other industries, positive adoption of index-linking may represent the first and critical step toward reducing the risks of price volatility.”

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