In a normal year, the Transpacific contract season would mean we'd see clients and their NVOs or ocean carriers sitting down discussing what contract or spot diversification strategy makes sense.
However, this has not been a normal year. The discussion is now whether yearly contract rates, quarterly contract rates, spot rates, or split contract/spot agreements are appropriate for the remainder of 2023.
Each option carries with it considerable implications.
Yearly fixed, contracted rates:
Whether direct with an ocean carrier or fixed rates with an NVO, contract rates are now expected to trend higher than spot rates. Since the fixed market has been trending so much higher than the spot market, importers have balked at shipping on those rates, let alone signing new contracts.
Of course, we know that the spot market will not remain significantly lower throughout the entirety of 2023, given anticipated Q3 and Q4 return of “normalized” ordering and projected continued capacity constraints. Even today, there are fresh signs of GRIs in the FAK market making these waters even murkier.
If demand doesn't increase and capacity remains wide open, clients who sign fixed contracts for 100% of their freight will wish they hadn't.
However, if demand increases throughout 2023-albeit at lower or “normalized” levels and ocean capacity tightens, clients shipping on contracted rates will come out winning. That is, however, if they choose the right partner who will honor signed rates. If we learned anything during COVID, many freight partners seemed to forget what rates were agreed upon when freight prices skyrocketed...
Quarterly fixed, contracted rates:
A quarterly contract is exactly what it sounds like: a contracted rate that resets every quarter.
Clients that signed quarterly contracts won’t get the lowest of the low rates, but they'll have stability in rates for 3 months.
The issue here is that if rates trend higher, the next quarterly rate you'll be expected to sign will be higher than what you've been shipping on for the past 3 months, offering very little hedge against increases.
If rates trend downward, clients won’t be able to take advantage of the dropping market for 3 months.
With a quarterly contract, clients will not have an opportunity for a big win in either direction as the market moves.
Spot rates are exactly that. They're subject to the changing market, and as we've seen since March 2020, these can fluctuate significantly, and do so every 15 days.
Right now, spot rates are low, and capacity is wide open. However, this is unlikely to continue throughout the year. Threats of April 15 or May 1 GRIs are real and gaining steam, but it is yet unknown if they will hold and maintain traction.
The question of a rising spot market isn't a question of if, it's a question of when.
Clients who continue shipping exclusively on the spot market will win if the market stays where it is, the floor.
They'll lose when the market inevitably trends higher, and space tightens up.
Split contract/spot rate agreements:
If we assume that the market cannot possibly stay at pre COVID rate and capacity levels, but clients aren't ready to commit fully to a fixed contract, then a healthy mix of the two makes sense.
By agreeing on a 70/30 contract/spot freight plan, for instance, clients can still take advantage of the current spot market while also protecting 70% of their freight when the market inevitably shifts.
So, what should you do?
No doubt navigating the 2023 ocean freight market will require some combination of predictive analysis, betting on the American economy, and trusting your gut, but shipper clients must make sure they do a few things:
· Trust your ocean carrier or NVO.
· Have candid conversations with them about your inventory replenishment plans.
· Diversify your ocean freight with split contract/spot agreements.
One thing is certain:
Shipping exclusively on the spot market will likely end in clients begging for space and cringing at their spot rates. Unless, alternatively, you believe that for 12 months carriers will not make significant adjustments to space and the market will see no significant return in volumes from the three year lows we just experienced in March....count me NOT in this camp.