Negotiating Freight Rates 101: Short-Term, Annual, and Semi-Annual

Negotiating Freight Rates 101: Short-Term, Annual, and Semi-Annual

The logistics industry is in a constant state of flux, with fluctuating rates giving companies plenty of reason to stay informed. At the end of 2022, the Freightos Baltic Daily Index (FBX) China-West Coast assessment was down 93% compared to its all-time high in September 2021. One crucial aspect of container shipping rates is the process of renegotiation as it allows shippers to avoid overspending. To achieve successful negotiations, it is essential for shippers to equipped with quality data, which will help them with their rate negotiations going into 2023.

This article will discuss three different terms of freight pricing events: short-term, semi-annual  and annual contracts. It will discuss their benefits and the specific challenges shippers should consider when approaching a request for pricing with their logistics partners. By having full access to their shipping data, shippers will be prepared for their next rate negotiations.

What is Rate Renegotiation?

In Q1 of 2022, FreighWaves wrote about the state of the ocean freight industry, reporting on high container rates and the risk that comes with shippers signing 12-month contracts. The article explained that if the rates were to fall any further, there would likely be regrets, which could be avoided by shorter contract lengths.

Rate renegotiation involves shippers negotiating with carriers on the rate of their next contract. They should assess the rate of their previous contract and whether the service is worth what they are paying, in a process that involves looking at market trends and competitor pricing.

As rates fall, shippers look for ways to improve their cost-effectiveness throughout operations, leading many to reconsider contracts and renegotiate rates. This is also the case when the end of the year approaches and many agreements reach their contracted end date. Container spot rates—the price for a single shipment without a contract—typically are an early indicator of the direction of longer-term contract rates, reflecting the direction of the market.

With the three options of terms for freight rates—short-term, annual, and semi-annual, shippers need to consider what works best for their needs and how they can effectively negotiate with carriers.

Short-Term Rate Negotiation

A short-term contract for ocean freight may range from one week to several. Short-term contract rates are generally higher compared to longer-term contracts due to the flexibility they offer shippers to renegotiate with other carriers frequently and the low commitment they require. Since the carrier’s goal is to plan further in advance to optimize their network by locking in longer-term contracts, in many circumstances, the higher price of short-term contracts point may be a missed opportunity for the shipper to save on costs if their service needs are consistent enough. Of course, as we saw in 2022, rate trends can be hard to predict, and shippers don’t want to be left paying too much because they are locked in.

The primary benefit of short-term rates is the control they provide, allowing shippers to react quickly to changing market conditions. However, this frequent renegotiating must be backed up by analytics on their past data and the current market. Shippers must use their data to develop a precise understanding of their exact service needs and the service they received from the carrier from their last contract.

Semi-Annual Rate Negotiation

Semi-annual contracts can be a good option for shippers looking for a middle ground in securing and locking down capacity. These contracts are generally six months in length. The incentive for shippers is that it provides adequate coverage for half of the year without the need of negotiating new rates each quarter. Longer terms might be appealing if container rates were to increase over the term of the contract, but shippers should always weigh this against the consequences of rates decreasing instead, while considering the chance of either case occurring.

Annual Rate Negotiation

Annual contracts are on the longer side of contracts that shippers can use, but there are also multi-year contracts (like 24 months), which are not as common. Shippers should be confident in their expected usage for the year in order to choose an annual contract, but the benefit is better rate discounts. Annual contracts can provide more certainty for shippers when there are capacity issues, and it allows shippers to form longer-term, reliable carrier relationships. However, they undoubtedly offer less flexibility than short-term contracts and spot rates and make shippers vulnerable to volatility, but some shippers prefer to operate this way to avoid a frequent process of rate renegotiation throughout the year.

Like short-term contracts, it is vital that shippers have access to the current and past data on their operations. This gives shippers a foundation for negotiations based on an accurate understanding of their annual shipping needs.

Prepare for Rate Negotiations with More Complete Data

When rates are falling, shippers need to ensure the contracts they enter into are keeping them in a favorable position. This is true in every type of market condition as well—when rates are increasing and when they have been steady. To make the most of their contract negotiations, shippers must be equipped with complete data as provided by visibility and analytics.

With VIZION API, shippers can get real-time container visibility enabling shippers at any time to get a detailed picture of their container operations, plus powerful analytics that translate to insights they can use. To learn more about the value VIZION’s data can provide for rate negotiations, reach out to us today to book a demo.

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