Index-Linked Container Contracts Take-Off

Monday, December 12, 2011

Half of all index-linked contracts filed with the US Federal Maritime Commission reference Drewry’s Container Freight Rate Insight pricing benchmarks.

 

Drewry Maritime Research’s container freight rate benchmarks are the index of choice in index-linked container contracts, according to the US Federal Maritime Commission (FMC). The agency also indicated that uptake of index-linked container contracts on US trades was fast growing. Index-linked contracts allow freight rates to be adjusted during the life of the agreement by reference to an external, independent market price index.

 

Speaking at the Container Freight Derivatives Association’s (CFDA) Global Container Freight Forum in London last month, FMC chief of staff Lowry Crook said that over 50 index-linked contracts had been filed with its organisation this year. Many more are expected to be filed in the upcoming contracting season. “Of the roughly 50 service contracts filed with the FMC that reference freight indices, nearly half refer to Drewry’s index,” confirmed Crook. These benchmarks are published monthly and online in Drewry’s Container Freight Rate Insight. The FMC has a good knowledge of shipping agreements as all carrier-shipper service contracts covering US trades must be filed with the agency by law.

 

“The Commission’s comments quash any misplaced impression that carriers will not sign index-linked contracts that reference spot rate indices,” commented Martin Dixon, research manager of Drewry’s Container Freight Rate Insight. “Indeed, several carriers have requested that we expand the range of aggregated indices to meet the fast growing demand for index-linked contracts from cargo owners.”

 

Index-linked contracts enable more stable, multi-year contract terms and reduce the threat that either party will walk away from the contract when market conditions change. Traditional fixed-rate annual contracts run the risk of locking shippers into high relative freight costs when the market falls and potential capacity shortfalls when market rates rise.

 

The FMC official explained that most index-linked contracts are based on annual price adjustments, although some adjust half-yearly or quarterly. Drewry’s Stable Market Adjusted Rate Terms model (SMART), a type of index-linked contract, incorporates a “ceiling rate” and a “floor rate” to mitigate the risk of extreme price volatility. “More and more retailers and manufacturers are coming to Drewry for advice on how to construct index-linked contracts,” added Dixon. “We recommend our SMART model to companies considering the use of index-linked contracts.”

 

Drewry is the market leader in the provision of container freight rate market intelligence and sea freight procurement advice. It publishes container freight rates on over 550 different port pairs as well as several aggregated indices, in its Container Freight Rate Insight. This is published both online and as a monthly report. These container freight rates and aggregated indices are widely used for benchmarking, market analysis and as a reference point for index-linked contracts.

 

Drewry also publishes container freight rate indices on 11 East-West routes in collaboration with Cleartrade, through the World Container Index (WCI) joint venture. Unlike Drewry's Container Freight Rate Insight, the WCI is designed to be used as a pricing mechanism for the settlement of derivative trades and hedging. However, the WCI can also be used as a reference point for index-linked contracts.

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