Gordon Downes, chief executive officer of NYSHEX, discusses how ocean service contracts can be fashioned to include actual commitments on the part of both carriers and shippers.

Ocean shippers are finding it extremely difficult these days to obtain commitments by carriers for space on ships. Reasons include a significant increase in demand for freight services, bottlenecks in the movement of cargo throughout the supply chain, and capacity limitations. The resulting higher prices for ocean carriage are a reflection of supply and demand patterns, Downes says. 

Shippers that waited until late in the contracting season to obtain space commitments from ocean carriers have been especially affected. In the past, they delayed signing contracts in hopes that prices would go down. When markets were soft, they felt free to walk away from their commitments to carriers if spot rates dipped lower than those negotiated under the contract. Then, when prices rose, they could fall back on contract rates.

Carriers, meanwhile, have routinely delayed picking up cargo secured under contracts, either “rolling” it to a subsequent sailing or eliminating certain sailings entirely. The situation has one wondering whether there was ever any “service” in traditional service contracts.

Downes says it’s time for a new approach to contracting, with the pandemic causing shippers to rethink their contracting strategies, and emphasize resilience over cost. Carriers today, he says, are open to signing “two-way committed contracts,” whereby the shipper promises to tender a set amount of business and the carrier in turn promises to load it on a timely basis. For their part, supply chain professionals need to identify those lanes in which there is predictable cargo flows, then lock that in. “It’s big shift,” says Downes. “In the past, shippers didn’t pay that much attention to delivering specific commitments to carriers.”