Shippers and Carriers Eye Alternatives to Long-Term Contracts and Fixed Rates
By Carly Fields
The days of long-term contracts and fixed rates are past, according to a Rethinking Freight Formats panel discussion at Breakbulk Middle East. Now, shippers and carriers are turning to alternative contracting methods to secure carriage.
Steffen Behrens, president for the Middle East for deugro, said that the pandemic had fundamentally changed the whole approach to contracting, and that shippers are “still trying to figure out how to do it right.”
There is not yet one perfect solution, he added. “You will not get long-term rate validity today, especially for an EPC project where you do not know the volumes, the engineering and so on.”
Cost-plus contracts were offered up by the panel as one alternative to the contracting methods of the past. However, that too came with caveats. Behrens said: “You need to define exactly how you want to deal with cost-plus. We have seen clients that have gone with three cost-plus agreements, and we have seen challenges and difficulties with that.”
Overall, there is a desire to shift towards a fairer and more balanced operating environment, reducing the number of unnecessary risks and with “less gambling,” said panel moderator Cyril Varghese, global logistics director at Fluor.
In this new operating environment, he asked whether there were opportunities for the market to look at different pricing mechanisms. One suggestion was the indexation of freight rates, using those to benchmark standard routes, similar to the indices used in other shipping sectors.
In answer, Evgeny Poltavets, managing director and partner at MLB Shipping DMCEST, said that while they do currently use a multipurpose time charter index to gauge direction of travel on freight rates, creating an index to cover the whole sector could be problematic.
“If we talk about instruments and tools to use, there is no clear answer.”
Fellow panellist, Andreas Rolner, managing director at United Heavy Lift, was also pessimistic on the usability of an index for the breakbulk and project lift sector. “I don’t see this working in our market. You need a generic cargo, you need a fixed lane and you need to guarantee a certain amount of volume on that fixed trade.”
Varghese suggested that freight forwarders could consider moving to an index-linked strategy: when freight rates increase, shippers will be compensated; when freight rates decrease, carriers will be compensated.
Meanwhile, he said that adopting a cost-plus – rather than a lumpsum – basis is a “very reasonable approach.” But he urged the audience to be very clear on what is considered as cost-plus and to ensure that there is transparency, accountability and fairness. “We are custodians of our clients’ money, so we need to be clear on what the cost element is.”
Rolner added that while high rates are always welcome for asset owners, stability is just as important. Here, Varghese referred to the use of freight forward agreements, a form of hedging for the sector, as financial instruments that could support that stability.
While a comparatively new concept for the multipurpose vessel sector, some MPV operators are already employing futures hedging as part of a broader risk management strategy.
Varghese noted that at a base level the practical problem is how to ensure accountability and transparency in freight costs. He conceded that there will not be one solution that works for all stakeholders, so therefore the industry needs to come together to a solution that is “reasonable” to all.
Check out our post-session interview with Behrens:
