News / Don't chase that final dollar, warning to shippers delaying signing new contracts

© Rodjulian

Shippers delaying signing long-term contracts in the belief that the market could soften in their favour, have been warned by Xeneta’s chief analyst, Peter Sand,  not to “chase the final dollar”.  

He said: “The worst enemy for shippers is their own greed.” 

Indeed, market analytics platform Xeneta called to mind Q4 23, when some shippers chose to delay signing annual contracts on the Far East to Mediterranean trade as the threat of geopolitical tension had begun to translate into rates.  

Fast-forward seven weeks and short-term rates increased 243% following escalation in the Red Sea, and surcharges were also imposed on long-term rates.  

“Those who waited too long to commit to a long-term contract, or were more reluctant to deviate from a more traditional procurement process, are now facing the consequences of abnormally high spot market rates,” said Xeneta. 

 Which, it added, will have had an impact on long-term contracts signed in January-March this year.  

A Xeneta customer survey that compared behaviour from last year to this, revealed the number of annual contracts had decreased, from 52% to 43%, whereas three-to-six-month contracts had increased, from 13% to 26%.  

“The behaviours we’re witnessing towards contract negotiations appear to be a symptom of the times. The low number of new contracts entering validity in March is partly explained by it being the final month in the quarter, but also due to shippers choosing to delay signing new long-term contracts,” said Xeneta.  

“The spot market is currently considerably more expensive than the long-term market, but it is continuing to soften, and shippers are doing what they can to avoid locking themselves into high rates on long-term contracts,” it added.  

Matthew Gore, partner at shipping law firm HFW, told The Loadstar earlier this year that index linked contracts (ILAs) could offer a “balanced solution” for those contracting in a volatile market.  

“With ILAs, inevitably the rates will simply track the market, albeit with a time lag. They can be entered into for a long period and it takes away the admin focus from rates.  

“You can, then, as a carrier or a shipper, work more closely and build relationships together, away from a position where the parties are purely focused on rates and look more to service,” he said.  

And, as tensions in the Red Sea show no signs of abating, this week has seen both Hapag-Loyd and CMA CGM announce FAK spot rate increases on the Far East to East Mediterranean trade, of $4,150 and $4,400 respectively.  

Indeed, Xeneta warned that no matter what contracting method a shipper opted for, they would inevitably face an uptick in costs from their previous contract. 

Mr Sand concluded: “The moral of the story? Don’t go chasing the final dollar. Instead, balance the risk of higher costs against the value of striving for the lowest rates possible.”