Index-linked ocean container shipping contracts are increasing in popularity among shippers and freight forwarders. For some, it’s about maintaining control during extreme market volatility and heightened risk of opportunistic behavior. It is also a way to reduce the need for constant re-negotiations as markets rise or fall, allowing shippers/carriers to focus on dealing with whatever issues are actually causing market fluctuations.

The problem is, some indexes contain a potential flaw that could cost shippers millions of dollars a year.

The potential flaw

Looking to global ocean trade, the vast majority of goods are shipped using 40ft containers (FEU). Yet, many index-linked contracts benchmark against 20-foot equivalent unit (TEU) indexes rather than FEU indexes.

While the math should make it simple – double the size, double the cost – the reality is far more complex.

For example, using data from the period February 2020 to May 2024, the average cost of one FEU on the Shanghai to Santos trade was 10% higher than one TEU. Meanwhile, on the Shanghai to Antwerp trade, the average cost of one FEU was 79% higher than one TEU.

The above data makes it clear that while a FEU is more expensive, it is less than double the cost of two 20ft equivalent containers.

Importantly, the price differences between TEU and FEU are not static and change considerably over time. For example, a FEU on the Transatlantic trade has been shown to range between 6% and 46% more expensive.

Across all trades, this delta is highly volatile.

The potential cost to shippers

To illustrate the magnitude of this issue, indexing against TEU while shipping on FEU on the Shanghai to Santos trade would have cost on average an additional USD 4298 per container between February 2020 and May 2024. That is an eye-watering USD 4.3 million for every 1000 containers shipped.

Even if a service provider offers a discount against the TEU index as part of the contract, caution must still be exercised. For example, in the case of the Shanghai to Santos trade, a discount of 44% would be needed just to offer parity with a FEU index. Again, the problem for the shipper in this scenario is the FEU/TEU price differential is not static – so any discount offered on day one of the contract may be insufficient within a short period of time.

While Xeneta strongly supports the use of index-linked contracts – they offer greater financial visibility  and help to build more trusting relationships between shippers and services providers – there are steps shippers can take to avoid this potential flaw.

Actions shippers can take

One of the simplest actions you can take is to make sure your contracts are benchmarked/indexed against the correct equipment type. If you ship on 20ft containers, then use TEU data. If you ship on 40ft containers, use FEU data. For Xeneta customers, they have access to both in a single platform.

To understand the wider context around this topic, and to uncover datapoints that speak to the financial implications of index-linked contracts benchmarking against TEU indexes rather than FEU indexes, you’re invited to read Xeneta’s latest blog outlining the cost implications of this situation.

This blog focuses on two main trade lanes: Shanghai to Antwerp and Shanghai to Santos. These trades were chosen to illustrate the extremes of this situation, but they are also of great significance to global supply chains. It also outlines what shippers can do to better protect themselves against paying too much.

Discover more here.

If you’re interested in deep diving further into the world of ocean and air freight, join us this October at the Xeneta Summit.