Index-linked contracts are “less desirable” on the transpacific trade, as shippers “need predictability on cost”, and favour longer, traditional contracts, it was reported this week.
CEO of Hapag-Lloyd Rolf Habben Jensen told a press briefing at S&P Global’s TPM25 event in Long Beach, California, the German carrier had seen a slight increase in index-linked contracts.
He said: “Index-based products sound really, really nice, and in some cases, also work. We have a fair bit of volume on index-based pricing.”
Index-linked contracts track freight rates and offer periodic price adjustments to the agreed rate, and have been hailed as a way to ensure both shippers and carriers get a fair deal when large divergences occur between spot and contract rates.
According to Mr Habben Jensen, they are more commonly sought after on Asia-Europe trades, rather than on transpacific or transatlantic routes.
Stuart Sandlin, MD of Hapag-Lloyd North America, explained: “On the transpacific, people need predictability on cost and, because of the market that drives the transpacific, we see more traditional, longer-term contracts agreed.”
But he added that “the cycle of procurement seems a little earlier this year”, adding: “I think people are more focused on commitments today – commitments from us and commitments from them.”
Indeed, Mr Habben Jensen explained that “index-based pricing only works if you have also a commitment on volume”. He said: “Because otherwise you will always see that when the index is up or down, dependent on what’s available in the market, people will not adhere to the contract.
“An index-based contract works if you say ‘we make a commitment to each other, and we’re going to be there whether it’s high or low’. You cannot make an index type of agreement only as a sort of a hedge – like you use it when you like it and you don’t use it when you don’t like it,” he added.
Mr Habben Jensen said that in recent years, Hapag-Lloyd had been “driving much more discussion” to ensure “commitment from both ends” when drawing up a contract.
And he said the carrier had been “pretty successful” in agreeing “more volume with higher commitments.
“I think that is something we will continue to do.” he concluded.
