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To Sign a Contract or Not Sign a Contract? The Industry’s Biggest Question

As contract negotiations with carrier's sprint towards a close, the shipping industry is beset on all sides by uncertainty; a product of geopolitical conflicts, weather-related problems, human error, and severe overcapacity presented by a record number of deliveries during the last six months. In spite of all this industry chaos, rates continue to remain extremely volatile as capacity is moved from market to market, making the decision to sign a year-long contract with a carrier a difficult one for shippers.

At this time last year, rates were at historic lows.  However, the recent and continuous wave of unpredictable global crises is causing rates to fluctuate. Even relatively minor events, such as Denmark closing the Great Belt shipping lane due to a misfired missile, are making shippers jittery over the state of the world and the effect these seemingly “rare” events have on the market. As a result, shippers are left with a difficult decision: to sign a contract directly with a carrier who has shown little historic evidence of honoring contracts when geopolitical and critical global issues arise or pay variable rates in an unstable market.

“The volatile climate surrounding contract season this year due to geopolitical factors and uncertain alliance futures means shippers shouldn’t hold their noses, sign on the dotted line without knowing what they are buying, and commit to one carrier for an entire year,” said Anthony Fulbrook, president of OEC Group’s North American Region. “Instead, shippers would be better served to keep open and play the spot market for a good portion of their freight.”

One upcoming event that is giving shippers and carriers pause is the possible ILA strike that will affect all ports on the U.S. East and Gulf coasts. Part of the fear is that this labor issue could result in significant slowdowns or a full-blown strike that could force cargo to be imported through U.S. west coast ports and then trans-loaded and shipped by ground to its final destination. Based off of the recent rhetoric from union leaders, it seems likely that some labor action will occur if their demands are not met. If any action occurs it will most likely make shipments arrive slower and cost more.

However, even if labor action were to occur, experts cannot definitively say that rates will in fact increase and that contracting with a carrier is a better overall option in the long run.  In fact, many believe that importers who choose the variable rate option will still come out ahead.

“Shippers should think long and hard before signing a contract with a carrier in this climate, because while it’s easy to say, ‘those terms look fine, let’s put it in the budget and move on,’ the reality is there is money to be saved by keeping your options open as alliance uncertainty and geopolitical instability still have a huge role to play in this year’s market,” said Frank Costa, Vice President of Sales for OEC Group.  “Importers should be looking for a partner with industry knowledge who has a track record of making accurate pricing predictions and identifying industry rate trends that could allow shippers to keep moving their cargo even during a very challenging and geopolitically restrictive market.”

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