News / Cargo contract conundrum: annual agreements, or go for shorter-term deals?

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Despite another turbulent contract season, most major US shippers continue to favour annual ocean freight agreements over shorter-term or index-linked alternatives, according to industry executives. 

Stephanie Loomis, head of procurement, pricing and commercial relations, ocean product, at Noatum Logistics, told The Loadstar this year’s transpacific eastbound contracting cycle had been the most challenging of her career. 

“By far, in my 30-plus-year career, the most complicated and confusing transpacific eastbound contract season,” she said. 

“We’ve had decades of it being rather easy to contract, in the sense that carriers are pretty aligned in pricing structures and what a base rate from one lane to another is, and baf – although it has always fluctuated quarterly – has not had dramatic impacts on the overall cost lane by lane or region by region. 

“Now, of course, that’s been completely thrown out the window. You’ve got very different methodologies, carrier by carrier; some are implementing these high emergency fuel surcharges, some want to change their bunker monthly.” 

Ms Loomis said many shippers still preferred annual-rate tenders, but calculating those rates had become significantly more complex amid diverging carrier pricing models. 

She added: “I am hearing in the market that there are a lot of shippers that are worried about the potential if the war were to finally really end, if we see an opening of the Strait of Hormuz – that will change dramatically the capacity and the vessel routings, and that could impact spot rates, so I have heard more shippers and importers looking at shorter-term deals, six months more indexing.” 

However, she noted that the “big BCOs in the United States”, for the most part, remained committed to annual contracts. 

That view was echoed by Mark Chadwick, president of the Global Shippers’ Association (GSA), speaking to The Loadstar on the sidelines of TIACA’s Executive Summit in Warsaw. 

In ocean freight, he argued, larger cargo owners still had the leverage to secure long-term arrangements. 

“If you’re a big enough shipper,” he said, “you can impose one-year rates and avoid peak season surcharges and all this other stuff.” 

Mr Chadwick acknowledged that exceptional market events required flexibility. 

“If there’s a massive thing happens, like when the Suez Canal was kind of closed down, there has to be some flexibility,” he said. 

“We’re still going for one-year rates. If you listen to the consultants, everybody should be doing short-term rate negotiations, but we’re not really seeing that. We’ve seen that even through turbulent times, one-year rates, as long as you’re open to some flexibility, it pays off.” 

The same principle increasingly applies to air cargo procurement. 

“That’s completely absurd now,” Mr Chadwick said of the two-year airfreight contracts the GSA once negotiated. 

“We try and do one-year fixed rates, and then in situations like at the moment, if there’s a sustained and significant change in the market, we’ll have discussions, and we’ll try to make some adjustments. When the ecommerce bubble really kind of skyrocketed the rates, we had to have discussions on China outbound, but other than that, we try and keep to one-year rates.” 

Despite persistent volatility across both ocean and air freight markets, index-linked contracts remain uncommon. 

“Agreeing on which index is the first problem,” Mr Chadwick explained. 

“The carriers are interested in indexing when it’s in their favour, and when it’s not, then they just don’t want to touch it. And we know there are companies out there that index, but whenever we approach the carriers, they’ve said they’d rather carry on as they are. They’re not coming to us offering index solutions.” 

He added that both carriers and shippers often had commercial reasons to avoid strict index-based pricing. 

“If carriers see that they can make a killing in the market, they might not want to wait for the index to tell them they can,” he said, while shippers may be able to secure rates below index levels from carriers pursuing market share. 

Instead, Mr Chadwick suggested, indices could serve as market indicators rather than automatic pricing mechanisms. 

“One thing I propose for air freight is, instead of indexing and moving your price based on the index, an index that indicates a trend at which you trigger a discussion,” he said. 

“Like we saw with the China outbound in the ecommerce peak, all of the indices showed that rates were through the roof. That gave us the kind of the openness to have a conversation to talk about that price, rather than us being tied to ‘if it goes in 10% your rates go up 10%’.”