Ocean freight industry standard practice has long been that large shippers secure high volume annual contracts with fixed rates directly with carriers. Non-vessel-operating common carriers (NVOCC’s) are also able to secure long term fixed pricing in addition accessing the spot market, providing a variety of booking options. Smaller shippers and freight forwarders often operate in the spot, which sets up a very dynamic marketplace with many stakeholders. This model is now facing more scrutiny than ever. Larger shippers have historically received favorable ocean freight rates, but are they getting the service levels they need? From the carriers’ perspective, it’s very difficult to deliver a complete value proposition if rates are not compensatory. Given the number of stakeholders and ever changing dynamics of a market still plagued with over capacity, carriers are struggling to manage through this next wave of industry consolidation.
2016 ushered in sweeping changes to the ocean freight industry, including mergers, acquisitions, alliance shake-ups and the Hanjin bankruptcy. One of the main problems of the standard contracting practice is that agreements aren’t honored by either side. This becomes a recurring cycle that entices carriers to overbook sailings to prevent losing the capacity onboard a fixed sailing. In response shippers book multiple slots for a single container to ensure capacity. Is there a better way to ensure that carriers’ and shippers’ interest and commitments are aligned? Many are considering Guaranteed Forward Contracts in their ocean contracting toolbox.
The idea of a guaranteed forward contract was developed by a group called the New York Shipping Exchange (NYSHEX). Guaranteed forward contracts lock in containers for carriers and capacity for shippers, protected by neutral intermediaries that dish-out significant penalties for each party failing to uphold their end of the contract. This idea is not entirely new because carriers have always attempted to impose penalties on shippers for container “no-shows”. The new guaranteed forward contract binds shippers and carriers to abide by the terms of the deal. Under the terms of the contract, NYSHEX will assess penalties against shippers that don’t meet their container quota for a specific sailing and carriers that roll cargo despite agreeing to provide certain capacities. Basically, the contract agreed via the Exchange would push shippers and carriers to conduct their business relationships similar to other industries.
“This is the first solution that brings a value proposition that speaks to both shippers and carriers,” said Jesper Præstensgaard, chairman of ocean carrier Unifeeder, and a non-executive board member of NYSHEX. “All prior attempts to do automation or exchange of freight spaces, it’s always been ‘either/or.’ “It’s always been a situation of who can strong arm who.” He believes “there is a structural overcapacity and that capacity is a perishable commodity.” NYSHEX contracts will help carriers fill out their capacity needs but smaller shippers don’t have the bargaining chips that large shippers do when negotiating these favorable annual contracts. These mid-level to smaller shippers are stuck to manage with regular amendments to contracts and rates, and the chance their cargo could be rolled during certain times when capacity on the outbound is tight in certain ports. These are all risk factors that increase the costs for the smaller scale shipper.
The supporters of the NYSHEX’s guaranteed forward contract admit that the contract isn’t intended as a replacement for existing ocean freight procurement procedures. It’s meant to be a third option to traditional contracts and the spot market. With a NYSHEX contract, shippers and forwarders use the online exchange to find a carrier providing capacity on a sailing on which they want to book a container. Such developments in container shipping are promising and beg the question, “Will guaranteed forward contracts be able to serve as a catalyst for carriers, shippers and forwarders to change the way they do business?” Time will tell.