Usually, the period between January and April is the busiest time of the year for the shipping industry. Importers typically get ready to explore options in the market and evaluate the possibility of signing contracts with fixed rates with steamship lines directly, and/or Freight Forwarders.
The purpose of this brief article is to highlight some crucial points we need to consider getting ready for the next contract season. To be ready, you need to start studying now and monitor the market to understand if you, as an importer, are ready to take the next step.
As I mentioned before, contract season is open between January and April. If a company works directly with steamship lines, the deal will be probably be negotiated at the very beginning of the year and most likely extend until the end of March.
When big BCOs have signed their contracts (Walmart, Target, Costco, etc.), carriers check how much space is left on their vessel fleet and start selling NVOs fixed rates. Negotiations continue through the very last day of April. This is the period when it is possible to catch the best deal, trying to understand at what price and under what conditions to sign various rates for different trade lanes.
The contracts will cover the period from May until the end of April of the next year.
At this point, we will focus our attention on topics from a Importer/Freight Forwarder prospective.
MQC (Minimum Quantity Commitment):
To have access to a “fixed” deal, an importer that gives the business to a freight forwarder should be ready to commit to a certain amount of containers/TEUs. Usually, the minimum is 200 TEUs, but depending on the steamship line, this minimum amount may be even higher. As a direct consequence, not every company can take advantage of this option. It depends on how much TEU volume the importer is planning to move.
It is important to keep in mind that the MQC cannot be generically related to all the port pairs that an importer is using to ship. The MQC must be connected to specific lanes, sometimes with different origins allowed within the same country.
For instance, an importer can sign a contract from Chinese base ports to Dallas Rail Yard for a specific MQC, but it would be more difficult, or impossible, if the port pair combinations are too varied and have different price schemes. The volume of varied lanes does not justify a fixed rate.
This is the specific terminology used to assess penalties in case the MQC is not fulfilled. The steamship line charges the Freight Forwarder for unused TEU commitments. As a direct consequence, penalties are charged back to the importer.
When an importer signs a contract with a Freight Forwarder, the importer needs to make sure, or at least be aware, that a “loading ratio” may apply. This means that the freight forwarder who is offering the fixed rate will allow the importer to load “X” containers with the fixed rate and “Y” containers with the actual spot rate. Usually, the ratio is expressed like 1:4. For example, this means one container loaded with fixed rates and four containers loaded with spot rates.
It is very important for the importer to clarify this detail, because it may completely change the nature of the deal.
PSS (Peak Season Surcharge):
Another “tricky” aspect that needs to be clarified is whether your fixed rate is “subject to PSS” or not. This could really affect the deal you are about to sign because during peak season, the fixed rate might go up as much as $200 or $300. In this case, you should check with your Freight Forwarder what type of rate you are looking to file, and whether or not it is subject to PSS. You should inquire whether your Freight Forwarder is willing to assume the risk and offer you a rate not exposed to PSS.
This is not really a shipping-specific term, but it helps us express a concept that must be the foundation of the business relationship between an importer and freight forwarder. Additionally, in general, it applies to any type of business where people are involved.
Once the fixed rate is agreed to between the two parties, it is time to start moving the freight under the contract conditions.
The freight forwarder must honor the rate filed without any change during the period agreed. The importer needs to support and ship both during slack and peak seasons.
This way, the steamship line will not argue when finding space at filed rates when space gets tight, and the freight forwarder will be able to move the freight for their importer throughout the entire year.