Container contract system broken – BCOs steer toward short-term deals

BCOs will commit 25% less volume to long-term contracts this year, sending almost twice as much via short-term and spot deals.

“This strategy will leave carriers with fewer contracted, forecasted containers and BCOs spending more time and resources renewing and negotiating contracts this year, even as prices for those may increase anyway,” says a report by Freightos Research published today.

The online freight marketplace surveyed 63 BCOs and freight forwarders in March, just ahead of the contract season on the transpacific, and compared the results with a similar study from 2018.

The responses demonstrate “how painful a year it has been” for BCOs and forwarders, said Freightos.

Respondents report having 70% more containers rolled and an 87% increase in how significantly spot rate volatility had hit their logistics spend, compared with three years ago.

“Forwarders and BCOs also plan to seek better reliability through redundancy; ie, contracting with multiple carriers,” said Freightos.

The past year clearly shows “the mostly ignored fact of the ocean freight industry: contracts in their current form are broken”, it said.

“This year, more than ever, undermined demand-side confidence in ocean contracts,” it added. “At points in 2020, some top carriers were rolling half their containers, including contracted containers bumped in favour of spot bookings or costly surcharges added on top of contracted rates,” claimed Freightos.

But it added that volatility had “led to pain on both sides of ocean contracts”.

“Carriers lament the cancelled orders and no-shows at the start of the pandemic affecting their ability to manage utilisation levels and plan capacity levels ahead, and BCOs wince at not being able to move all their volumes at contracted rates when capacity is tight.”

Carriers are under pressure from shareholders to maximise earnings from the lucrative spot market, but at the same time they want to ensure they have the support of contracted cargo when the demand bubble eventually bursts. A carrier source told The Loadstar recently the debate between short- and long-term business was causing “quite a rift” in marketing meetings.

“On the one hand, it’s difficult to ignore the massive returns from spot business, but some key account managers argue strongly it is a short-sighted strategy to reduce or ignore tenders for annual contracts,” he said.

Moreover, if the industry moves towards more short-term deals, this will take up more of carriers’ and shippers’ time that could be used to grow their respective businesses.

“Redundancy could also mean less leverage for BCOs/forwarders and less reliable volumes for carriers,” said Freightos.

“The past year has only made more obvious in freight what other industries have known for a long time – players in volatile markets need the tools to manage risk even in times of crisis.”

The report was released ahead of a joint Freightos and Baltic Exchange panel discussion webinar this afternoon, when the findings from the survey and the way forward for the industry will be debated.