Shippers’ success in annual contract negotiations: A snapshot of the ocean container shipping market

Shippers and carriers just completed their annual contract negotiation cycle, setting the stage for the ocean container shipping market for the next year. We conducted a survey of shippers to analyze the results of this year’s new contracts and their comparison to the previous year’s terms. The current state of the ocean market exhibits significant differences from the most recent year, and as we expected, our survey results indicate that shippers got the lower rates and abundant capacity they wanted. 

The results aren’t surprising – shippers got the pound of flesh they sought to make up for last year’s higher rates. However, there are intriguing data points to monitor throughout the year. Here are a few we are watching:

• Contract Length: nearly 90% of survey respondents signed a standard 1-year contract, while no shippers signed a multi-year contract. This indicates that carriers are bullish about the future and aren’t entertaining longer-term deals, expecting rates to be higher by this time next year.
• MQC (Minimum Quantity Commitment): respondents contracted, on average, ~80% of their volume for the year. This is about what we expected, indicating that some shippers believe there still may be room for rates to drop, allowing them to take advantage of the spot market (rather than contracting 100% of their volume). This strategy is what we commonly see within the marketplace due to the uncertainty of shipper volume forecasts, but it poses a gamble and may either payoff if rates dip or cost more in the long run if rates increase.
• Demurrage and Detention: more than half of respondents achieved increases in their detention and demurrage free time. While improvements were also seen in per-diem charges, the per-diem reduction was less significant than the free time improvement (only about 1/3). Given the reduced port and warehousing congestion, shippers are less likely to hang onto containers for as long as they did last year, warranting the longer free time. Showing confidence that they can manage to those tolerances, shippers appeared to not push as strongly for per diem improvements.
• Rate Decreases: no surprise here; rates are down significantly versus last year. Shipper respondents on the transpacific lane reported an average reduction of 70% (in-line with Drewry’s Shanghai to US index reduction of 79% YoY). On the transatlantic lane (Europe – U.S.), however, shippers indicated a reduction of only 60%, driven by the macro-effects such as congestion and sustained demand on that trade lane.
• Potential uncertainty in the Transatlantic: the 60% average rate reduction on the transatlantic lane may understate rate reduction opportunities on this lane throughout the year. The transatlantic lane rates were slower to fall than the transpacific, and contracted rates may be misaligned with the market in the back half of the year. Shippers may seek opportunities to leverage spot volume on these lanes or explore renegotiation opportunities with contract carriers if this dynamic unfolds.

As discussed in our 2023 Container Shipping Outlook, this dynamic market bears watching with continued economic uncertainty and the unknown impact of shippers’ efforts to reconfigure supply chains to insulate themselves from the rate volatility seen in the recent past. Shippers appear to be in the driver’s lane for now, but how long will this last?  Carriers still have a stockpile of cash from the last few years and look well-positioned to weather the period of lower rates, leading to our observation, This Time is Different.