Though the logistics and supply chain industry has made and continues to make a lot of progress in its digital transformation, it has a reputation for being part of the late majority or even a laggard in terms of digitalization.
Air cargo for example, though continuing to make digital strides, is still behind – and is often compared to – passenger travel where digitized capacity, pricing and online bookings have been around for decades and is in some ways the digitalization template air cargo is referencing.
Challenges for Container Contracts
But a far more acute problem shippers face today is rolled cargo. Here too, other industries (even closer to home) can provide guidance.
A recent Freightos Group survey on long-term ocean container contract reliability found that at the start of the pandemic when ocean spot rates first surged, importers saw 34% of their contracted containers rolled by carriers prioritizing more lucrative spot shipments. And when rates plummeted in early 2023, carriers saw importers no-show on their volume commitments in favor of the less-expensive spot market.
But this problem isn’t new.
A similar study from 2018 found the same flaws and dynamic led to poor contract reliability even in much less volatile times. And Red Sea diversions are leading to rolled containers for shippers right now, once again.
Lessons from Bulk Shipping
Here, again, ocean freight is looking to examples from other industries for tested solutions to recurring problems. Our recent webinar on the subject featured Phoebus Kaloudis, an expert in bulk shipping derivatives, who shared bulk’s similar problems in the past, and how the emergence of reliable bulk rate indices in the late 1990s started the industry on its path toward index-linked long term contracts – thereby eliminating the incentives for contract failures – and managing rate fluctuation risk through a derivatives market based on the new index.
For bulk, the market crash in 2008 was a turning point that pushed its derivatives market to maturity and led to the widespread hedging in bulk today. Our other guest, Peter Stallion, Head of Container Futures at Braemar, thinks the pandemic will prove to be the turning point for better container contracts and effective risk management through derivatives, like Forward Freight Agreements (FFAs) based on the Freightos Baltic Index – itself a product of freight rate digitalization.
The (Digital) Path Forward
Progress has already begun – including the first FFA recently traded on the Singapore Exchange – but these things take time. Passenger travel proved that digitized capacity and pricing benefits both carriers and customers, and that model is being applied and developed for air cargo. Bulk shipping proves reliable contracts and price risk management within a volatile market are possible, and digitized rates will be one factor that helps the container market get there too.
If you’re interested in learning about how to use container derivatives, you can reach out to Peter here.
If you missed it, you can check out our recent monthly freight overview right here.
