News / Shippers test index-linked contracts as rates slide

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After several years of extreme volatility, shippers and forwarders are increasingly experimenting with index-linked contracts as a way to manage risk in container shipping, according to Freightos chief strategy officer Ian Arroyo.

Mr Arroyo spoke to The Loadstar on the sidelines of this week’s Manifest conference in Las Vegas about how spot rates on major east-west trades have fallen sharply from their January highs, with further downward pressure expected as overcapacity builds and tariff uncertainty eases.

“On the surface, this looks like a market where traditional annual RFPs make sense again,” Mr Arroyo said. “And we are seeing some return to that. But there’s still a lot of burn from the last few years.”

This “burn” refers to the succession of shocks since 2020 – from Covid to geopolitical disruptions and tariffs  – which, according to him, have made fixed-rate contracts far less reliable than they appear on paper.

In reality, annual contracts, according to the booking platform executive, rarely deliver true price certainty, as surcharges, rollovers and renegotiations quickly come into play when markets move.

Index-linked contracts, tied to benchmarks such as Freightos Baltic Index (FBX) or the Shanghai Containerized Freight Index (SCFI), are increasingly being tested as an alternative. Mr Arroyo said many shippers were now allocating some of their volumes to index-linked pricing to see how it performs alongside traditional contracts.

Crucially, index linking is often paired with financial hedging, and “that’s where derivatives come in”, he explained. “You can set a maximum and a minimum. You’ll never see the extreme highs, but you’re also protected on the downside.”

This approach mirrors risk management practices long used in commodities such as oil and soybeans, but which are now, finally, gaining more traction in container shipping.

Improved data quality has been a key enabler. Mr Arroyo said data resolution, accuracy and freshness were now high enough for most market participants to trust index-based pricing, something that was not the case a decade ago.

At the same time, real-time data consumption is contributing to volatility, as markets react instantly to geopolitical developments or policy signals.

So, while index linking is not yet mainstream, Mr Arroyo believes it could become so within a few years. He noted that several of the top ocean carriers were now open to index-linked contracts, and volumes traded against benchmarks were gradually increasing.

“In a world where supply chain shocks can happen overnight, shippers need tools that let them respond in real time,” he said.

“Index linking is part of that shift.”

Check out The Loadstar Podcast with Container Trades Statistics, breaking down the biggest shifts in volumes, pricing, and tradelanes over last year.