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What’s the best way to handle container rate changes?

With container spot rates down significantly over the past three months, it’s no wonder that shippers are hastily renegotiating contracts. The cost of moving a 40ft box from China to the US West Coast (FBX01) has dropped 58% from USD 15,817 to USD 6,593 since April. It’s a similar story across the 12 trade lanes covered by FBX, a leading daily independent assessment administered by the Baltic Exchange.

Will ebbing consumer demand and reports of retailers struggling to shift inventory from their shelves put further pressure on rates? Or will the prospect of port, rail and truck strikes around the world, the lifting of Chinese restrictions and ongoing US demand for Asian goods see further congestion and push rates back up again? I’m not a container analyst, but it’s clear that there are many conflicting signals for carriers, forwarders and shippers to factor into their negotiations.
But are annual and often fractious rate reviews between carrier and shipper, which are then subject to frequent renegotiation if the market moves significantly, really the best way to manage freight rate risk?
Rather than rely on an annual rate review and inefficient renegotiations, an index-linked contract is potentially a better way to manage container rates. It allows companies to sign contracts which provide an adjustment mechanism as the cost of ocean transportation rises or falls. Whilst an index-linked contract enables both parties to feel that they are paying or receiving a fairer rate, it does not completely remove their exposure to a fluctuating market.

Floating long-term contracts could be a better solution for the industry. They reduce the tension in the carrier/shipper relationship and allow for a focus on improving service. They allow for a price that correlates with an index which accurately tracks market rates. Critically, they provide for security of contract.

Typically, an index-linked contract will settle monthly and will reflect the monthly average rate of that benchmark, perhaps with a pre-agreed percentage premium or discount monitored on a quarterly basis. The contract terms are of course entirely up to the parties involved and fully flexible with the goal of banishing costly and inefficient contract renegotiations.

The daily published FBX is the perfect index for these types of contracts. Covering 12 routes which account for approximately 80% of ocean container movements, the FBX’s trade lanes are the median, port to port rates, for a standard forty-foot, non-refrigerated container, based on carriers’ rolling tariffs and related surcharges. The rates are based on real-time data from hundreds of logistical providers who use the Freightos Webcargo rate management software to manage their bookable freight rates. This means that the calculations instantly capture spot market movements.

There are lots of indices out there, so why use FBX? Quite simply, it’s about the quality control and transparency. Does FBX really do what it says on the tin? The benchmark is administered by the Baltic Exchange, an entity regulated by the UK’s Financial Conduct Authority. This brings a very high level of transparency, longevity and trustworthiness to the index. In fact, our benchmarks are used extensively for index-linked contracting in the drybulk and tanker freight industries. As the administrator, the Baltic Exchange is responsible for maintaining the governance framework which includes core decision making functions related to the creation, management and distribution of the FBX.
Source: Baltic Exchange

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