Tired of fluctuating rates from Asia? Can not keep up with constant rate changes? Can not foresee what your freight cost will be like even in 10 days especially during traditional so called peak seasons? Well, you are not alone. Especially Transpacific trade is notorious with rate fluctuations. I explained the reasons behind constant rate changes from Asia on my previous blog posts. That’s why I won’t get into its details here. However, if you like you can read the article from http://morethan.mtstechnyc.com/why-do-the-freight-rates-change-so-often/ in order to refresh your memory.
Rather I would like discuss Fix Rate deals.
Fix rates are yearlong rates, usually valid for 1 year and immune from the GRIs, PSS or other surcharges.
Although some carriers recently added” subject to PSS” portion during peak season, usually fix rates are not effected by the increases.
Fix rate deals have been in the market for a long time now however for the past few years it has become to be known to a larger group of companies. With the fix rate contracts, importers commit yearlong volume to a specific carrier in exchange of ocean freight rates that are valid for 1 year.
In theory fix rate deals are a great idea. Why shouldn’t it be? With the fix rate contracts, importers are able to calculate their freight costs today for the orders that they might get 6 months later.
Again, it is a great idea on paper but is it really? In my opinion committing a fix rate deal is like investing to the stock market. Freight rates are up and down. Sign a fix rate deal when the rates have downward tendency and you might end up loosing a lot. Just like in the stock market when you buy when it is in the highest point and if you are a short term investor, you might end up losing money. Signing a fix rate deal also can save you substantial amount on ocean freight cost or make you miss the opportunities of the floating market rates.
For example 2 years ago, importers that moved their freight on fix rate contracts saved a lot on the freight costs due to the fact that market rates were on their highest levels during that time.
This being said, following is some of the details that need to be considered and studied before committing to the fix rate deal:
1- Gather market intelligence
2- Check the number of new vessels that will be deployed to the market that year
3- Go over the general economic indicators
4- Forecast your volume
Having general understanding of the market will help you save on the freight costs. You don’t want to commit for fix rate when the market in general is expected to go down. Read the market analysis and expectations for that particular year,
If the number of new vessels that are planned to deploy on a particular year is high that might be an indicator or over supply and therefore it will affect the rates downward. If you are small importer fix rate deal might not be for you as the volume is one of the biggest defining factors of how good rates you will be offered.
Don’t forget committing to fix rate deals will not guarantee that you will be allowed to allocate all your shipments with those rates. Steamshiplines will try to maximize their profit and want to mitigate their losses. Therefore they might implement some rules which are made available to cargo owners in the last minute in fine prints on the contract. I have seen similar situations in the past. When the floating market rates went above the fix rates the steamshiplines started to reject bookings with fix rates or they dictated some of the bookings must go with market rates.
At some point in the recent months, US East Coast rates skyrocketed and hit their highest point. Fix rates all of a sudden have become almost $2000 cheaper than the market rates. Almost immediately steamshiplines implemented “one to one” rule. This meant that for each container that was loaded with a fix rate, same number of containers must have been booked with market rates. Out of two containers 1 was OK to book with fix rate and 1 must have been booked with market rate.
Or if you want to get onboard you might be “highly suggested” to utilize the market rates. Moreover some carriers have very strict policies in regards to contract completion. If you commit let’s say 500 containers and load only 200 at the end of the year, you might get hit by penalties for not fulfilling the contract.
Some might think, why not commit the fix rate and ship with market rates if they go down the fix rate levels and utilize the fix rates when the market rates are high? This is strictly not allowed by the carriers. Or if you are a regular importer, you might get away with this for 1 year but you won’t be offered the fix rates next time.
My strong suggestion to importers is that they need to study the market well before committing for any rate deals. Read the fine prints, talk to your service provider, get their opinion and definitely do not jump in these deals without analyzing it well. You might end up losing a lot on the freight. On the other hand, well analyzed fix rate deals will protect you from the volatility of the ocean freight rates, constant surcharges and increase attempts and the short term valid rates. So now is the decision time. Fix rate deals or not?