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The COVID-19 pandemic has made many in the shipping and exporting business pay close attention to how spot and contract rates have changed. There has been a significant increase in spot rates in the months following the spread of the COVID-19 infection, followed by more moderate increases in contract rates. Throughout this period, extreme rate volatility impacted shippers' freight procurement spending and complicated supply chain, transport, and inventory planning. With global uncertainty and geopolitical tensions, various stakeholders closely monitor freight rate developments.
In this article, we will discuss the ocean freight contract rates and ocean freight spot rates, their correlation, the circumstances in which they prevail, and how carriers and shippers aim to balance cargo carried on spot rates and contract rates for maximum advantage.
When a shipper or cargo owner needs to ship cargo overseas, they approach container carriers with an inquiry, providing all necessary information. Carriers then provide quotes, specifying a certain rate validity. Long-term contracts offer better rates, guaranteed space, rate stability, and minimal surcharges for larger shippers with steady cargo flows. In contrast, spot rates are dynamic, short-term rates available in the market. Shippers without regular or sizable cargo volumes approach carriers on an ad hoc basis. Spot rates are valid for a short period and change with market fluctuations. In exceptionally volatile times, they may have very short validity periods.
1. Validity Period: Spot rates typically have very short validity, often lasting no more than a month, and essentially involve playing the spot market. On the other hand, ocean freight contract rates usually have a far longer validity, often spanning one year.
2. Tactical vs. strategic: Spot rates are a tactical approach involving short-term commitments and reliance on the spot market to secure the best rates now. In contrast, contractual rates are negotiated strategically and holistically, considering long-term supply chain requirements.
3. Ad Hoc vs Regular Cargo: Ocean freight spot rates are employed for ad hoc cargo shipments, meaning they're used when cargo flows are irregular or unpredictable. Contractual rates are favored by shippers with consistent cargo flows over the contract duration, experiencing fewer fluctuations.
4. Volatility: Contractual rates offer more stability in freight and transport costs because they remain fixed for the duration of the contract. Spot rates, however, are inherently volatile and can change frequently, influenced by various factors affecting freight rates.
5. Rate Levels: Contractual rates are often negotiated lower than spot rates, mainly because they are part of a transactional, short-term business model without long-term customer relationships.
6. Cargo Regularity and Seasonality: Contractual rates are ideal for cargo with steady, regular flows and limited seasonality. In contrast, spot rates are commonly used for cargo prone to significant fluctuations based on seasonality or specific occasions.
7. Space and Equipment Guarantees: Contractual rates often come with commitments from carriers to provide assured space and equipment. However, certain contingencies or market changes may affect this commitment. Spot rates are determined by the current supply and demand situation, usually ensuring space and equipment availability.
8. Minimum Quantity Commitment: In contractual rates, shippers typically commit to a minimum volume of cargo to be offered to the carrier during the contract's duration. Spot rates, being more ad hoc, don't involve such quantity commitments.
Both spot and contract rates offer different value propositions. Contract rates offer year-long price and capacity stability, making them the preferred choice for shippers with predictable supply chain needs. On the other hand, spot rates come in handy when contract carriers are unavailable or for unplanned shipments on lanes without negotiated contract rates. If your supply chain is well-organized and predictable, opting for contract rates brings stability and assurance. For last-minute or unforeseeable shipments, spot rates are a suitable choice.
Spot rates and contract rates each come with their own set of advantages and potential drawbacks. The choice between them should align with the specific needs and dynamics of your business. If you have relatively consistent factors in your production, such as the volume and timing of your loads and the lanes, then contract rates will most often be your answer. Spot rates may be the better option if your company has many factors that fluctuate, be it timing, volume, or destination. It is important to note that spot rates can be more expensive than contract rates, but they offer more flexibility and can be a better option for shippers who need to move cargo on short notice.
Understanding the differences between ocean freight contract rates and spot rates is essential for shippers and carriers for maximum advantage. Shippers can make informed decisions about which freight rate to use for their shipments by considering the factors that impact freight rates. Whether you choose spot or contract rates, you must choose a reliable carrier with the necessary equipment and space to move your cargo safely and efficiently.
As you navigate the complex world of ocean freight rates, it's worth noting that CARGORATES.ai is here to simplify the process. Our platform offers an intuitive solution for comparing rates, making informed decisions, and gaining comprehensive rate visibility. With the ability to effortlessly manage rates from multiple carriers, we empower you to streamline your shipping processes. Whether considering spot rates, contract rates, or both, CARGORATES.ai provides the tools and data to enhance your supply chain and make the best shipment choices.
CARGORATES.ai is a unified platform that provides efficient and effective rate management.