Why shippers can renegotiate some long-term contracts but not others

Posted on September 23, 2022 at 5:58 p.m. by

The Maritime Executive

After a year of very profitable freight rates, container shipping activity appears to be normalizing. Over the past week, the Shanghai Containerized Freight Index (SCFI) global spot rate index for shipments from China has fallen 9.7% from its peak at the start of this year. This is the third week in a row that the SCFI index has fallen on major trade routes.

The situation is also similar for other indices, notably Drewry’s World Container Index (WCI). According to data released last Thursday, spot rates fell 8% week-over-week to $4,942 per FEU, down 52% below the peak of $10,377 seen a year earlier. early.

However, this sudden drop reveals an interesting concern for contract shippers. For this category of shippers, the spot rates are much lower than the rates they have negotiated in their contracts, which poses a dilemma between renegotiating or reallocating the cargo in the spot reservations.

The August issue of Xeneta’s XSI Spot Index Report has already shown that contract rates on the eastbound trans-Pacific route are higher than spot rates.

Will shipping carriers consider renegotiation to accommodate these unprecedented changes?

Two carriers – Yang Ming and Hapag Lloyd – gave the opposite reaction to this concern.

Yang Ming’s chief operating officer, Chang Chao-feng, recently revealed that the carrier was facing pressure from customers to renegotiate freight rates.

“Because spot rates have plunged, we are facing pressure from some customers demanding rate adjustments for long-term contracts. In principle, Yang Ming offers short-term discounts in response to such requests. Even if the terms of the contract do not allow price revisions, Yang Ming is flexible to maintain long-term relationships with customers,” Mr. Chang said.

On the other hand, the CEO of Hapag Lloyd, Rolf Habben Jansen, ruled out any renegotiation of the annual contracts with the shippers.

“We don’t do that. Either you close a contract or you don’t,” said Habben Jensen.

So, is there ambiguity in the types of contracts a shipper can sign with a carrier?

In a recent LinkedIn post, Gordon Trouncer Downes, CEO of New York Shipping Exchange (NYSHEK) claimed that not all “contracts” are contracts. In other words, the contracts Rolf Habben was referring to might be different from those Chang Chao-feng was talking about.

Founder went on to explain that there are generally two categories of contracts in the market today.

First, there are the traditional contracts, which are ambiguous.

“For example, these contracts may have a Minimum Quantity Commitment (MQC) that the parties agree to abide by throughout the contract, but with no commitment as to what week the cargo will be shipped or on which service. These contracts can even include penalties or damages for non-performance, but without clear covenants it is virtually impossible to prove who was at fault – thus rendering these contracts unenforceable,” Trouncer said.

The second type involves an increasing number of new contract types where commitments are clearly defined on a weekly basis and ports and routes are specified.

So, in this case, a carrier understands exactly what their obligations are, and so does the shipper. It is then possible to monitor the performance of each of the parties and consequences can be applied in the event of non-performance.

Trouncer believes these innovations in contract types are good for shippers because they give them a range of options to meet their business needs.

“Shippers’ purchasing managers now have a set of contractual tools they can use to better manage their supply chain risks. For example, if a shipper needs a predictable landed cost and consistent service levels, they can enter into a binding contract. Alternatively, if they want the flexibility to take advantage of low spot rates when the market softens, then the shipper can opt for a more traditional unenforceable contract,” Trouncer commented.

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