In the world of container shipping, the question of whether carriers should honour contractual commitments when rates rise is both practical and philosophical. Lars Jensen recently highlighted this dilemma on LinkedIn, sparking a lively debate within the industry. On one hand, the ideal of mutually binding contracts suggests that both parties should uphold their agreements, but the reality of container shipping tells a different story.
Lars Jensen, a leading expert in the container shipping industry, states that different carriers exhibit varying degrees of commitment to their contractual obligations. Some carriers are more exposed to contract markets, while others lean heavily on spot rates. This discrepancy often leads to varied levels of adherence to contracts, especially when market rates fluctuate significantly.
Take Maersk, for instance. During the early stages of the pandemic, Maersk was among the carriers that attempted to honour contracts more diligently. The company’s approach was not flawless, but relatively speaking, it was more consistent than some of its competitors. Data comparing Maersk’s global freight rates from 2020 to 2023 with the CTS global index, which combines both spot and contract rates, paints a revealing picture. The CTS index, the most comprehensive global average available, shows that Maersk’s rate increases during 2020-2022 were more conservative compared to the overall market surge. However, as market conditions reversed, Maersk’s rates plummeted just as quickly as the market average.
This data highlights a crucial point: if a carrier refrains from aggressively hiking rates during market upswings, their customers are unlikely to show loyalty when the market contracts. Over the 2020-2023 period, Maersk’s average freight rate was 10% lower than the market average, equating to a substantial revenue shortfall of nearly $16 billion in their Ocean business. This financial impact underscores the risk carriers take by adhering to contracts when market conditions are favourable.
Hapag-Lloyd provides another example. They also aimed to honour contracts during the upturn, experiencing similar setbacks. Despite this, Hapag-Lloyd managed to retain some advantage during the downturn, though their performance still lagged behind the CTS index by 4%. Meanwhile, HMM took a different approach. They aggressively capitalized on the market upturn, achieving rate levels 15% above the CTS index, but subsequently experienced a faster rate drop. In the grand scheme, this strategy seemed more effective.
It’s important to note that these observations are based on averages. Individual shippers’ experiences can vary widely, with some benefiting from consistent contract terms and others facing unexpected breaches. The broader market dynamics, however, reveal a complex interplay between contractual fidelity and market responsiveness.
So, why should carriers honour contractual commitments when rates increase? The case for doing so isn’t clear-cut. As evidenced by Maersk and Hapag-Lloyd’s experiences, the financial repercussions can be significant. Yet, some level of commitment can foster long-term relationships and stability in an unpredictable market. The decision ultimately hinges on a carrier’s strategic priorities and risk tolerance in a volatile industry.
Source: Lars Jensen
