Why is a new and enforceable forward freight contract needed?
Existing contracts do not provide predictable cargo flows. Spot contracts generally do not specify service levels from the carrier or volume commitments from the shipper. Consequently spot shipments are subject to high rolling rates, particularly on space-pressed vessels. Furthermore, spot contracts are generally valid for periods covering multiple sailings, allowing for significant variation in cargo flows from week to week. Service contracts also cover multiple months and a range of origins and destinations, allowing for significant variation in cargo flows from week to week and lane to lane. This variation is difficult for carriers to manage and often results in either rolled shipments or under-utilized vessels.(i)
(i) Service contracts are typically valid for 6 to 12 months and spot rates are typically valid for 1 to 3 months.
The NYSHEX Forward contracts are expected to provide weekly offers up to 6 months in the future.
What’s wrong with the industry’s current contracting processes?
Current contracting processes are resource intensive. Service contracts generally require face-to-face negotiations involving between one and three rounds. Each round requires shippers to allocate time from procurement teams, and to occasionally engage outside consultants and rate transparency providers at a significant cost. Likewise, the carriers need to allocate time from trade management, sales and often the executive level in the case of key accounts. Spot contracts are also time intensive. Although each spot quote is less time-consuming for carriers to prepare, the average spot quote success rate of 15-20%(ii) is far lower than the rate of successful service contract negotiations. In addition, spot quotes generally require carrier trade management to communicate price points to relevant sales teams, who then manually respond to shipper rate enquiries by compiling, emailing and filing spot rate quotes.
(ii) Data from one leading carrier on the Asia services
How is The NYSHEX Forward different than spot and service contracts?
THERE ARE FIVE MAIN WAYS
1) With The NYSHEX Forward, carriers offer fixed rate contracts to accredited shippers and forwarders that are members of the exchange. The NYSHEX Forward includes all mandatory charges, including basic freight, bunker adjustments and terminal charges. The rate is fixed, and not subject to GRIs or further discounting.
2) The NYSHEX Forward specifies volume, departure dates, place of receipt and delivery. Forward contracts are offered for a set departure week and origin/destination combination. The carrier would also stipulate the number of containers that can be contracted at each rate level. This allows carriers to manage allocations and charge departure-specific prices. For example, the vessel departing Yantian the week before Chinese New Year would attract higher freight rates than the vessel departing the week after Chinese New Year.
3) The NYSHEX Forward is fully enforceable with mutual penalties for non-fulfillment. The way it works is that deposits or collateral will need to be provided to NYSHEX before entering into this new type of contract. The NYSHEX Forward sets specific penalties for the shipper or forwarder failing to ship the contracted volume on the contracted vessel. It also sets specific penalties for the carrier failing to load the contracted volume on the contracted vessel. NYSHEX then settles all penalties directly from the prepaid deposit or collateral.
4) NYHSEX Forwards may be “exited” if the carrier, shipper or forwarder cannot fulfill on their contractual obligation. The NYSHEX Forward enables carriers, shippers and forwarders to manage unpredictable disruptions to supply chains and vessel schedules through the exit process. For instance, if a shipper can no longer ship the specified volume due to a short production run, the shipper may re-publish the contract on the exchange, where another accredited shipper may take over the original shipper’s contractual obligations. As long as the carrier receives the full contracted volume from an accredited shipper at the originally contracted price, the shipper with the original forward contract will not be required to pay any penalties. Likewise, if a carrier experiences service disruptions, the carrier may arrange for a substitute carrier to fulfill the forward contract and thereby avoid paying penalties.
5) Since NYSHEX Forwards are very different to service contract rates or spot rate quotes, the pricing of NYSHEX Forwards will differ depending on the market conditions.
Carrier Supply and Demand Scenarios
In conditions where vessels are space-pressed or pose a risk of rolling, carriers would offer secured space at a premium. However, in scenarios of excess supply, enforceable forward contracts will offer little additional benefits to the shipper or forwarder compared to standard spot rates. Consequently shippers will be unwilling to commit their cargo to any carrier on a NYSHEX Forward without a price incentive. In excess supply conditions, carriers may pass on a portion of the savings from reduced downfall rates to the shipper in order to incentivize the shipper entering The NYSHEX Forward
What are the benefits of NYSHEX and The NYSHEX Forward to shippers and forwarders?
THE THREE MAIN BENEFITS ARE:
1) Improved supply chain reliability. 84% of shippers need to ship unplanned cargo at relatively short notice that is not covered by any existing service contract. During periods of excess demand, shipping unplanned cargo on the spot market poses a significant supply chain management challenge as rolling risks can be high. The option to enter forward freight contracts with space protection significantly de-risks the supply chain. This allows the shipper to hold less safety stock and to reduce airfreight costs.
2) Fair and digital carrier offerings. Shippers and forwarders receive competitive forward freight contract offers from multiple carriers electronically. The offers present clearly visible carrier brands, transit times, reliability ratios and all-in rates. Shippers and forwarders receive all the necessary information they need to select the best contracts for their supply chain needs. (While shippers can see all carrier offers, carriers are not able to see their competitor’s offers.)
3) Efficient procure to pay processes. Shippers can instantly view and accept the electronic forward offers from the carrier. Shippers can manage the acceptance process in line with their internal procurement policies and financial controls. The fixed all-in price can immediately be captured into the shippers’ ERP systems to enable accurate payment processing, and even self-billing.
What are the carrier benefits?
THE THREE MOST SIGNIFICANT PLUSES ARE:
1) Improved vessel and network planning. Forward contracts provide the carrier with exact volume data for each departure week, origin and destination. In addition, the data has a high degree of reliability since shippers and forwarders will prioritize fulfilling the forward contracts in order to avoid paying penalties. With exact and reliable data, carriers can better plan vessels by reducing overbooking ratios and incurring fewer rollings, or instances of underutilization from unexpected downfalls. Furthermore, carriers can utilize the data to optimize their service networks.
2) A new and effective lever for capacity management. Carriers are able to use vessel specific pricing as a lever to better manage their available capacity. By offering higher forward rates for vessels that are likely to be over-utilized, carriers can incentivize cost sensitive or flexible shippers and forwarders to ship on earlier or later vessels with spare capacity. Conversely, carriers may offer lower forward rates for vessels that are likely to be under-utilized, incentivizing shippers and forwarders to shift volume and improve vessel utilization.
3) Efficient quote to cash processes. Forward contract offers can be electronically communicated to all shippers and forwarders that are accredited by the carrier. Any of the shippers or forwarders can electronically accept the forward contract offers. The process can be easily and efficiently managed by the carrier’s central pricing organization. And since forward contracts consist of a fixed all-in price, the invoicing process is simplified considerably with fewer disputed charges. The collections process will also be improved through the pre-payment of collateral or deposits.
What is the role of NYSHEX?
NYSHEX'S FOUR MAIN ROLES ARE:
1) NYSHEX accredits shippers and forwarders on behalf of carriers. NYSHEX will accredit shippers and forwarders according to the requirements of each carrier. The carriers may provide a specific list of shippers and forwarders, or a set of criteria that the shippers and forwarders must meet. Accredited shippers and forwarders are the only ones granted access to the electronic contracting system, as well as training resources and ongoing support.
2) The NYSHEX Forward is secured by collateral or pre-paid deposits. Deposits or collateral will be paid to NYSHEX in accordance with the contract requirements. NYSHEX will oversee deposit and collateral balances to ensure only forward contracts are entered that meet the deposit or collateral requirements.
3) NYSHEX registers all contracts and monitors fulfillment. NYSHEX will electronically register all contracts, including information regarding the respective parties, contract terms and price. In the event that a contract is not fulfilled, NYSHEX will analyze the shipment data in accordance with the contract terms and conditions. If the point of breakdown is clearly identified as either contract party’s fault, NYSHEX will pay the contractual penalty accordingly. If the point of breakdown or fault cannot be clearly identified, the default will be managed through arbitration according to the contract terms.
4) NYSHEX facilitates “exit” and penalty process in event of non-fulfillment. NYSHEX will electronically register each contract substitution and ensure all parties are in agreement with the change according to the contract terms and conditions. NYSHEX will monitor fulfillment, and will facilitate the settlement process in the event that a re-sale price differs from the original price.
What is NYSHEX’s governance structure?
NYSHEX is fully governed by participating carriers, shippers and forwarders. The carriers will have full control over which shippers and forwarders are accredited to view and accept forward contract offers. Carriers, together with a representative group of accredited shippers and forwarders will have full control over setting the standard operating terms and conditions.
How is NYSHEX regulated?
NYSHEX complies with the US Federal Maritime Commission (FMC) regulations and all forward contract rates to and from the US will be filed with the FMC. Contracts that do not ship into or out of the US will not be filed with the FMC. The FMC have been engaged and are supportive of NYSHEX. Formal application to the FMC will be made upon completion of the pilot.
Is NYSHEX compliant with US and EU laws?
Yes, legal counsel has evaluated the NYSHEX model in context of US(iv) and EU(v) laws and concluded NYSHEX is compliant. In the EU context, legal counsel have recommended a formal approach to the EU competition commission following the successful use case in the Trans Pacific Eastbound trade.