How to Evaluate Ocean Contracting Alternatives
Happy Strategic New Year!
The fireworks and dragons of Chinese New Year have passed, but for TPEB shippers based in the US, the excitement is only halfway through. Another new year and new season of challenges is fast approaching.
Welcome to the 2018 contracting season, when shippers confront dragons of a different sort by creating and committing to their ocean freight strategy for the next 12 months. When considering their strategy, shippers analyze how many different providers to contract with as well as how much of their overall volume they should allocate to 12-month contracts versus the spot market. There are opportunities and risks for shippers regardless of their decision. The variables they carefully consider include: forecast accuracy, variability of demand from week to week and sourcing location reliability for the next 12 months.
One of the things that shippers try to do as they prepare to negotiate with ocean providers is to predict how the spot rates will develop. While 12-month contracted rates are flat, spot market rates can be extremely volatile. In addition to rate concerns is a growing concern about service dependability. The spot market capacity has proven to be less reliable over the years. Demand cycles usually hit many shippers at the same time – forcing them to compete for space on the carriers’ most desired services. Booking downfalls and cargo rolling are often the challenges faced by carriers and shippers during peak conditions.
When shippers can use historical patterns and best estimates to predict their volumes, negotiating an annual contract is often the desired option for contracting. However, they must develop some prediction about where rates will be on the spot market. Despite the hours of analysis and prediction, sometimes organizations win and sometimes they lose when securing an annual contract.
The Spot vs. Service graph below is not atypical when comparing spot market rates to an annual-service contract. It is apparent here that during peak seasons, the annual rates are often competitive compared to the spot market and organizations can save significantly by having an annual rate in place. However, in these times, shippers may have to be concerned about rolling and unreliability if their rate is significantly below the market. Similarly, in off-season, an annual contract may be well above the spot market and the shipper loses the opportunity to save money for their organization.
Analyzing shipping alternatives involves a delicate balancing act. Until now, there have only been the two options described above: (1) secure space on annual contracts for set pricing and (2) secure short-term space at market prices whenever additional capacity is needed.
Recently shippers received a third option to choose from when their demand surpasses their planned weekly volume: The New York Shipping Exchange offers a new form of contract, the NYSHEX Forward contract, an enforceable contract between the shipper and carrier which ensures they can meet all their demand for ocean container space from two weeks to six months into the future. The space and departure window are guaranteed by the carrier and the rate, once a contract is secured, is locked and not subject to GRI’s or any additional changes. The shipper members of the exchange can view and buy binding offers from carrier members 24/7 and the average time to secure a contract is under 10 minutes.
Shippers who incorporate NYSHEX into their ocean contracting strategy find security and reliability when demand for ocean container space exceeds their planned capacity:
- In peak season they can supplement demand via NYSHEX, purchasing extra space at market prices with reliability assured.
- In slack periods shippers can enjoy savings for volume that exceeds their service contract commitments, while carriers are assured that the committed volume of containers will be delivered.
While annual service contracts continue as the mainstay for transpacific ocean container procurement, NYSHEX offers shippers and carriers a new choice that ensures reliability. As shippers prepare for this contracting season, they would do well to add NYSHEX Forward™ contracts to their plan for the “Strategic New Year.” Shippers can explore this option at no cost and without obligation by signing up for a free NYSHEX membership.