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Diversification is the Key to Success In This Year’s Contract Negotiations

It is clear after TPM that many shippers are still having trouble deciding whether or not to sign a fixed contract with a carrier or play the spot market. If they do sign a contract, then there’s additional difficulty deciding how much volume they should commit to that contract.

It’s understandable why many are having trouble making these key decisions in the next few weeks because it looks like, thanks to low spot rates, many shippers should be able to make up for the high ocean freight rates they’ve had to pay for the last two years. However, the reality is that taking the wrong course of action could have serious consequences to service reliability as many carriers will be forced to continue with blanked sailings and ultimately service closures, which could potentially cost shippers millions of dollars. Those who take the right course of action will ultimately rise to the top of their respective industries.

“This is a classic damned if you do, damned if you don’t market because shippers now have a very rare opportunity to recover their losses from the past two years,” said Peter Hsieh, Vice President of Sales and Marketing for OEC Group’s Northeast Region. “However, in order to recover the losses – and even get ahead – shippers must figure out the right combination of fixed and spot rates for their business within the next few weeks. Failure to get it right could result in missing out on a once-in-a-lifetime opportunity.”

The key to taking advantage of the current market is diversifying your fixed and spot rate portfolio because the market’s direction is still uncertain. For example, while container volumes are down, they are down relative to the historic pandemic levels. In fact, the current “downturn” is actually comparable along some trade lanes (if not higher) than pre-pandemic highs. From a historical perspective, volumes are not as low as they seem, and this indicates that fixed rates could be the right option.

However, carrier orders are being fulfilled for new large and ultra-large container vessels at a historic rate. Our industry has never seen the flood of newbuilds that will hit the market between now and 2025. As new vessels come into rotation, they are adding significant capacity into the market, putting further pressure on spot rates. This trend contradicts the other outlined previously and signals that spot rates might be the right option.

“The problem is, the historic influx of capacity means that space and equipment are not the bargaining chips that they used to be, and the focus is solely on rates. Committing to just fixed eliminates your opportunity to take advantage of the spot market, which is especially important during periods of slack demand where the spot rate will inevitably be at its lowest,” said Frank Costa, Vice President of Sales for OEC Group’s New York branch. “Our advisors can help manage your combined portfolio of spot and fixed shipments to ensure you’re always on the right side of market swings. That’s the most effective way to build your supply chain under the current market conditions and it is a much better offer than you’ll ever get from any carrier.”
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