Ocean Freight Contracts Update: ‘There’s A Lot of Shippers Who Are Just Waiting’

Glenn Taylor
·4 min read

With ocean freight contract negotiation season underway, brands and retailers are taking their time to find the right price in the wake of the skirmish in the Red Sea.

Annual ocean freight contracts typically run through the end of April before expiring, but even as the time to strike a new deal winds down, shippers still want to see where short-term spot rates end up.

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The largest shippers typically set the benchmark for contract negotiations, according to Judah Levine, head of research at freight booking platform Freightos.

“There’s a lot of shippers who are just waiting,” Levine told Sourcing Journal. “In a normal year, maybe there would be more progress already in early March. The different tiers of size of shippers use [the largest shippers] as a benchmark and negotiate their rates relative to that. The biggest shippers get the best deals. As far as I know, I haven’t seen any major importers coming to agreements yet.”

While short-term spot rates escalated heavily at the start of the Red Sea disruptions when vessels were getting diverted around southern Africa, the peak was brief, and has deescalated again.

“The good news is, we reckon that the contract rates starting May 1 will be slightly lower than where they are currently, so the previous expectation that the Red Sea crisis could really inflate contract rates has not materialized,” said Philip Damas, managing director of Drewry Supply Chain Advisors.

As of Thursday, spot rates from Shanghai to Los Angeles are $3,934 per 40-foot container, according to the Drewry World Container Index (WCI) while contract rates on the same trade lane are roughly $1,800 per container—less than half of the spot rates and a nearly $2,000 swing to move the goods.

And across other trade lanes, the gap between spot and contract rates is at roughly $2,500, according to Gautam Jain, CEO of freight management and logistics software provider GoComet.

Damas predicted that spot rates on that trade lane will continue to collapse in the second half of this year to roughly $2,000 per container, “about half what they are today,” especially as more shipping capacity continues to come online in 2024.

“At that point, there will be a much more normal and smaller gap between spot rates and contract rates,” Damas said.

The falling rates have spooked the CEOs of both Maersk and Hapag-Lloyd, who both acknowledged the market impacts of a larger orderbook of vessels. Load factors, the level to which ships are filled with cargo, will fall below 80 percent in the second quarter, according to Damas, thus driving prices further down.

Three-month deals become a viable alternative

Due to the continued declines, the option of a long-term contract might not be as enticing for beneficial cargo owners (BCO) if they are concerned about spot rates continuing to plummet.

Jain told Sourcing Journal that two clients of GoComet, a tire company and a pharmaceutical firm, opted for shorter contracts in the immediate term given the fear of missing out on a cheaper deal.

“They are planning either to do monthly spot rates, or they will do a three-month contract only, Jain said. “Not a longer contract, which will usually do for one-year contract. But they know that this is probably not sustainable for the long term, so that is why they will be moving to a longer-term contract after getting the benefit of the current lower spot rates. After these three months, they will move to probably a longer contract.”

During a session at the TPM24 logistics conference in early March, one trans-Atlantic shipper said they were following a similar strategy, according to Levine.

“The shipper used to do annual contracts and now they’re just doing three-month contracts and rolling to the next month when they can revisit it,” Levine said. “I think there’s a lot of hesitancy because of what happened during the pandemic, as well as really what keeps happening today. A lot of times with negotiations, it’s treated more as a framework than a strict agreement.”

Contract rates deliver more stability, particularly for larger shippers like Walmart or Target that have an ongoing influx of freight over a longer period of time, regardless of season. But in the event of a sinking (or spiking) spot rate, contracts can be renegotiated.

When spot rates fell below contract levels in late 2022 and into 2023, 77 percent of BCOs and freight forwarders reported renegotiating with partners to lower active contract rates, according to a recent survey from Freightos. Among those who renegotiation, 52 percent they renegotiated more than once a quarter.