Home » Breaking News, Maritime » Index-linked contracts gaining popularity, says Drewry

London-based Drewry Maritime Research said the US Federal Maritime Commission (FMC) has identified its container freight rate benchmarks published in the Container Freight Rate Insight as the index of choice in index-linked container contracts.

“The agency also indicated that uptake of index-linked container contracts on US trades was fast growing,” Drewry added in a recent press release.

Index-linked contracts allow freight rates to be adjusted during the life of the agreement by reference to an external, independent market price index, said Drewry, a provider of container freight rate market intelligence and sea freight procurement advice.

Drewry said FMC Chief of Staff Lowry Crook spoke at the Container Freight Derivatives Association’s Global Container Freight Forum in London last month, where he said that over 50 index-linked contracts had been filed with the FMC this year. Many more are expected to be filed in the upcoming contracting season.

“Of the roughly 50 service contracts filed with the FMC that reference freight indices, nearly half refer to Drewry’s index,” Drewry quoted Crook as saying. These benchmarks are published monthly and online in Container Freight Rate Insight.

The FMC has a good knowledge of shipping agreements as all carrier-shipper service contracts covering US trades must be filed with the agency by law, Drewry said.

“The Commission’s comments quash any misplaced impression that carriers will not sign index-linked contracts that reference spot rate indices,” commented Martin Dixon, research manager of Container Freight Rate Insight.

Index-linked contracts enable more stable, multi-year contract terms and reduce the threat that either party will walk away from the contract when market conditions change.

Traditional fixed-rate annual contracts run the risk of locking shippers into high relative freight costs when the market falls, and potential capacity shortfalls when market rates rise, said Drewry.

The FMC official explained that most index-linked contracts are based on annual price adjustments, although some adjust half-yearly or quarterly. Drewry’s Stable Market Adjusted Rate Terms model (SMART), a type of index-linked contract, incorporates a “ceiling rate” and a “floor rate” to mitigate the risk of extreme price volatility.

Drewry publishes container freight rates on over 550 different port pairs as well as several aggregated indices in its Container Freight Rate Insight.

It also publishes with Cleartrade the container freight rate indices on 11 East-West routes in the World Container Index (WCI). Unlike the Container Freight Rate Insight, the WCI is designed as a pricing mechanism for settling derivative trades and hedging. However, the WCI can also be used as a reference point for index-linked contracts.

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