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For Shippers

Why Spot Rates Can Be Better Than Contracts

Many people believe that the best way to get the lowest shipping rates is to sign a contract with a freight forwarder. For many services that we use daily, like our mobile phone services and magazine subscriptions, this is a great way to operate. But for international shipping, spot quotes often fetch the better rate. A spot quote is a rate that changes depending on the current state of the market.

In some cases, a contract provides shippers some security in terms of specific benefits like credit terms or an additional free day of container demurrage or detention. However, shipping rates within a contract will most likely, but not always, be higher than any spot rate simply because of the volatility of the world economy throughout the year.

Let’s imagine that the market is growing, but a new service is launched by a new shipping line – the offer will increase and the rates will decrease. In that case, you will benefit from the lowered rates if you get them on a spot basis.

On the other hand, logistics providers might face strained capacity, which would lead to rate increases. In this situation, the contracts would help shippers maintain certain rate levels. There will always be a risk, but that risk is certainly lower when choosing for spot quotes that adjust to the market. Flexibility can win better rates.

Logistics providers prefer contracts as a contract will always offer them safety, a continuous income, opportunities to make their services more efficient, and profit. Therefore, you might find that they sometimes prefer to make contracts in exchange for a steady volume.

It’s also good to know that there is a way to add some consistency and control the shipping rates, in spite of the changes in the market. Logistics providers are subject to the same circumstances that affect shippers: supply and demand. If a shipper offers the logistics provider some consistency in bookings, the provider will also be able to offer some consistency in rates without a contract. For instance, rates that are agreeable by both parties for a short period of time, such as one or two months. In order to reach such an understanding, the freight forwarder or logistics provider will check if the freight lane you require is impacted by peak seasons and if you are asking for a capacity guarantee. Of course, lower rates could imply cargo rolls and late deliveries. After a shipper and forwarder have worked together for a few shipments, this type of relationship (spot rates that are offered for a longer period of time) can develop.

 

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