Disruption in the liner trade and everything linked to it seems to have become the norm since the coronavirus pandemic a notion supported by the impact of wild rate swings and market uncertainty on shippers and carriers.
Staying aligned has become harder for all concerned with both sides struggling to predict whats next, says Eloisa Tovee of Xeneta.
Writing for the maritime analytics platform, she says friction during contract negotiations and fulfilment is at an all-time high.
In fact, its precisely this disconnect between fixed-rate contracts and real-time market conditions that raises questions around contract enforceability opening the door to opportunistic behaviour and leaving some beneficial cargo owners BCOs feeling ill-equipped to renegotiate with confidence.
The platforms content marketing manager says it leaves many across the industry asking the same question: How do we take the tension out of contracts when the spot market surges as much as six-fold during a contractual term dramatically higher than their baseline levels.
Worst case scenario?
It can manifest in overpaying for cargo or not getting allocation for shippers, Tovee says.
In addition, the effort to sign these contracts is high but the resulting outcome doesnt compensate for the efforts and shippers often spend even more time renegotiating.
It begs the question: How do we take the tension out of tenders and build longer-term relationships that flex with the market not against it?
Tovee says Xeneta has found that one answer gaining traction is to move away from rigid annual fixed-rate contracts.
This includes renewed focus on index-linked long-term agreements that flex with the market, irrespective of the level of volatility.
Behind this appeal for a renewed focus on service integrity is the pain of consistently broken contracts, Xeneta states.
The platforms Co-Founder and CEO, Patrik Berglund, says: Friction between the buyer and the seller prohibits long-term partnerships and long-term thinking and it drives transactional behaviour on both sides.
However, while fixed-rate contracts offer the illusion of security and predictability, in practice theyre often not fully enforceable, Tovee adds.
When market conditions shift, either BCOs or carriers may walk away. This can look like carriers pulling allocations in tight markets to chase higher spot rates or BCOs shifting volumes when spot rates crash. This widely accepted practice has created a cycle of broken expectations, strained relationships and missed shipments on both sides.
In an effort to find more insight, Xeneta also turned to Pederson at Maersk.
He says: Shippers need to predict demands and whether theyre actually going to get the space they bought from carriers at the rate they bought it. Its natural behaviour if youve already burned your fingers, the next time youre going to make sure you get back the money you might have lost. Youre going to make sure you buy more space than you may need because you, at least, want to have some buffer to cover those things.
However, he warns against such a response as it can cause a vicious cycle.
Tovee agrees: If customers are overbooking space and not filling it, carriers will start to see them as unreliable. And, as power dynamics change in line with market shifts, this will create a lack of trust and tension on both sides of the relationship.
Berglund says it, unfortunately, exposes the apparent lack of advanced problem-solving capacity in the container trade.
I find it hard to find any other commodity of this size that is dealt with in such an immature way. And I think more and more parties, companies, shippers, forwarders and carriers are realising that theres got to be a better way.