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Contract Duration Consideration

Introduction

As markets develop and react to economic circumstances, it is important to be aware of all your tendering options. With Xeneta you can

You could reasonably forecast that locking in a long-term contract at current rate levels would be undesirable.

A Look at Long-term Contracts

Consider the following historical trend for long-term contracts from 20-10-2018 to 20-10-2020 on the China East Main to North Europe Main:

View example in Xeneta

In this 2-year period, the market sees fluctuates considerably. When would be the ideal time to tender?

Using the Benchmarks graph from Xeneta, we can compare the market average to actual rates from our suppliers. As an example, we’ll take a look at the rates offered by an anonymized supplier (in brown):

We can see that at the start of our plotted period the rates offered by our supplier sit well below the market. Soon the market drops considerably and we renegotiate our contract for the next year down to take that into account.

Our year-long contract safeguards us from the rate spike at the beginning of 2020. When it comes time to tender again, we decide to pursue a 3-month contract due to the uncertainty caused by COVID-19. In turn, we pay a higher rate for our freight.

A Look at Short-term Contracts

If we take a look at the short-term contracts market for the same period, we quickly realize that our long-term contracts helped us weather significant volatility.

View example in Xeneta

If we continued to rely on short-term contracts past August 2020, we would have seen significant increase in costs given the substantial jump in rates starting in September 2020. Instead, we elected to lock in another long-term contract and thus avoided the rate increases.

Leveraging the Contract Horizon

By default, Xeneta only shows market data for the current day and historically. However, given that long-term contracts may extend beyond the current day or begin in the future, Xeneta can display this limited set of rate data to provide additional insight.

If we take a look at our earlier long-term market example again, but this time with the Contract Horizon enabled, we see the following:

View example in Xeneta

The gray area covers a period of 3 months past the current day. In this case, it indicates that long-term contract rates will begin to rise — mirroring the behavior of the short-term market.

While not a perfect prediction of the future, it does provide a strong indication that it may be worthwhile to lock in a long-term contract as soon as possible in order to ensure that your freight rates remain below the market.