Tuesday, June 26, 2012
Index-linked freight rate momentum for container-shipping grows
In response to the rollercoaster ride of the recent recessionary years and the subsequent impact on the global shipping industry, the age of containerized freight indices could be arriving in a bigger way by having them tied directly to shipping contracts.
"Cargill fully supports the continued development of index-linked contracts as a fair and impartial contract rate adjustment mechanism," said Duncan McGrath, the container freight manager of the Americas for Cargill in a recently released white paper on the subject prepared by Drewry Supply Chain Advisors in partnership with Cleartrade Exchange for their World Container Index.
Drewry contends the index-linked approach "serves to reduce the differential between contract and spot market rates."
"Index-linked contracts are a response to the failure of traditional fixed-rate forms of contracting to provide the necessary space, volume and price protections," according to the Drewry report that pointed to freight rate volatility in the global container-shipping market; particularly since 2009.
"The boom and bust freight rate cycle has wreaked havoc across international supply chains and shipping line balance sheets. Cargo owners have faced unexpected hikes in freight costs and shortages of vessel space. This has made it particularly difficult for shippers to plan ahead, while margins have been squeezed and sales lost," the white paper said.
In March, the U.S. Federal Maritime Commission issued a final ruling in favor of shippers and ocean carriers using such indices in contract negotiations, stating they could "provide flexibility and certainty to ocean carriers and their customers" as long as "they are readily available to the contracting parties and the Commission."
FMC Chairman Richard Lindinsky said of the ruling: "In today's marketplace, we can't control the winds, but we want shippers and carriers to have a range of options in how they set their sails."
Global container-shipping lines suffered a widely reported, financially devastating 2009 campaign that rebounded dramatically the following year on the heels of customer inventory replenishment, subsequently dropping again in 2011 amid vessel over-supply and rate volatility.
As a result, ocean carriers have been trying to institute a series of rate increases in 2012 in an attempt to recoup some of their losses in the face of continued new vessel tonnage scheduled to hit the waves over the next few years.
At the recent annual meeting of the Agriculture Transportation Coalition in San Francisco, Jeff Siewert, vice president of operations for U.S. exporter Interra, said general rate increases "can blindside advance sales."
Siewert cited a few examples from this year when his company closed trading deals in January for March delivery and a $350 general rate increase hit in March causing a trade loss for his firm, with similar circumstance occurring a few months later.
The concept of indices in container-shipping really took to the seas in 2009 when the Chinese government launched the Shanghai Containerized Freight Index (SCFI) with the announced mission "to standardize the transactions, to adjust the freight rates, and to communicate information on the shipping market."
Subsequently, Clarkson Securities Limited, the derivatives broking arm of Clarkson PLC, brokered the first container freight swap agreement between Morgan Stanley and investment bank Delphis against the SCFI.
At the AgTC event, Ben Gibson of Clarkson Securities said indices in shipping provide an independent source of market information for benchmarking and reveals "credible and interesting trends."
Major global shipping line groups have, for the most part, endorsed the FMC ruling on the use of freight rate indices in contract negotiations, however, Brian Conrad, executive administrator for the Western Transpacific Stabilization Agreement said his ocean carrier membership still has "some concerns about indexing based on specific commodities and feel that more discussion is required to answer key questions."
Some of the WTSA's concerns, according to Conrad, include: confidentiality versus transparency of customer rates; mutual benefit of indexing; increased clarity over how the index-linked contracts would work; should a government agency be involved in an exchange between two private commercial entities; and that using indices in contract negotiations doesn't address service issues such as schedules and customer service.
Drewry's white paper says index-linked container contracts should sprout from a similar foundation to the traditional fixed rate approach, where shippers and carriers need to agree on the scope of the contract to be index-linked, the contract period, the index to be used, the contract rate adjustment mechanism, carrier service commitments, and shipper volume commitments.
In the Drewry report, Jean Phillippe Thenoz, senior vice president for French shipping giant CMA CGM was quoted as saying: "Index linked contracts can only strengthen the commercial relationship between carriers and shippers."
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