News / Index-linked agreements: 'shippers have to have the stomach for them'

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Shippers pondering the pros and cons of index-linked agreements (ILAs) “have to have the stomach for it”, as expected rate plunges could make these agreements less enticing in the short term.  

ILAs track freight rates and offer periodic price adjustments to the agreed rate, and have been hailed as a way to ensure both shippers and carriers get a fair deal when large divergences occur between spot and contract rates.     

Chantal McRoberts, director of supply chain advisory for Drewry, said at this year’s TPM25 by S&P Global that for this kind of agreement to work, “you have to have both parties want to do it, and have the stomach for it”.  

“You both have to know there will be points in time when it’s working for one side and points when it’s not working; and you both have to be able to see it through. I think that’s one of the main blockers to people adopting it,” she explained. 

Indeed, with a trade war heating up and expected to stifle consumer demand, and drive down shipping rates, shippers understand that signing a long-term or index-linked contract could mean missing out on very low spot market fees. 

James Hookham, director of the Global Shipper’s Forum, told The Loadstar: “The full effects of last week’s announcements will take several months to play out… negotiations between US importers and their foreign suppliers over price and quantity will take place as break clauses and review terms in sales agreements allow.  

“It will be tough to hold your nerve if you have a contract, but equally difficult to take your seat belt off as the rollercoaster picks up speed,” he said.  

Some shippers are seeking an ILA to remove pricing from the negotiation equation altogether, and instead focus negotiations on service, delegates at TPM25 heard. 

Yao Zhang, VP of operations at furniture shipper Castlery, has agreed to index rates with Maersk. He explained that “there’s no talking about price” once an ILA is negotiated, so you can “focus all the energy on the service”. 

Indeed, Gordon Downs, CEO of software platform Nyshex, said: “I think there are some carriers which are now deliberate about, instead of straining, the relationships and renegotiating these contracts the whole time, and agree that the contract will follow the index, and then no-one’s a loser. Ultimately, that’s the one of the key drivers.” 

Mr Zhang added: “Based on our own experiences in the past few years… we proved together with our partner that we respect each other during volatile times.” 

Mr Hookham noted that the benefits of ILAs, and their “relative stability” over time, was often “deemed to be greater than the possible savings by playing the spot market”.  

“So, some ‘missing out’ on short-term gain is inevitable until the Index-linkage catches up. But that’s the deal,” he said. 

Mr Hookham warned that ILAs “may become more difficult to obtain for US trades, given the events of recent days – a bit like trying to ‘fix’ your energy bills when prices went wild following the invasion of Ukraine”. 

“If you are in an ILA and don’t want to be any more, then check the conditions for your termination rights, and any measures allowing renegotiation of the terms. I doubt that the US announcements constitute a force majeure, given how well signalled they were in advance,” Mr Hookham advised. 

“On the other hand,” he added, “those same provisions will be your protection if you are happy with your arrangements.”