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  October 11th, 2016 | Written by

Should Shippers Be Negotiating Their Rates Upwards?

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  • Offering to pay higher rates can benefit shippers' supply chains.
  • Freight rates in the spot market have spiked as capacity has been removed from ocean trade lanes.
  • Shippers are complaining of a shortage of space on key ocean trade lanes.

It sounds absurd that shippers might want to negotiate with ocean carriers for higher rates than those found in their contracts. But we are living in strange times, and a case can be made that offering to pay higher rates can benefit shippers’ supply chains.

For a couple of years now, shippers have been used to knocking down ocean carrier container rates, and the shipping lines have complied, to the point of offering non-compensatory rates in many cases. Many trade lanes suffer from an overcapacity of available space and that, combined with a slowdown in global trade, has left carriers scrambling to attract cargo and defend market share with rock-bottom freight rates.

But times are changing. The turning point may have been the Hanjin bankruptcy filing in late August. That action effectively removed a significant level of tonnage from the transpacific and Asia-Europe trade lanes. Carriers have also been moving to reduce capacity with tactics such as canceled voyages, and freight rates in the spot market have spiked accordingly. Now, reports indicate that shippers are complaining of a shortage of space on these key trade lanes.

The anecdotal evidence supports those reports, as stories emerge that carriers, prioritizing higher-rate spot cargo, are leaving some of the containers of their low-rate contracted shippers on the docks. For large shippers, who may be suffering shortages of hundreds of containers of cargo, that represents an unacceptable risk to their supply chains.

As bizarre as it sounds, one fix could be to negotiate higher rates with the carriers.

“Shippers are looking at the situation from a risk point of view,” said Patrik Berglund, CEO of Xeneta, at a recent get-together in Hoboken, New Jersey. Xeneta provides a database of ocean carriers rates in an effort to promote transparency in rate negotiations between shippers and carriers.

“The risk is being short-shipped if the contract rate is much lower than the spot rate,” Berglund explained. “Shippers are looking at rates to get where they need to be to get out of the short-ship danger zone.”

Using a tool like Xeneta’s, shippers are able to ensure that their rates are competitive and supported by market conditions.