Contracted Rates vs. Spot Rates for Sea Freight: Why Contracted Rates Are Usually Best During Rate Increases
At the time of writing (September 2023), sea freight rates are on the rise yet again. As a shipper, you may be tempted by the lower spot rates available. However, contracting rates can provide more reliability and cost protection when markets are volatile. In this blog, we'll compare contracted versus spot rates and explain why contracted rates are advisable during periods of increasing prices.
What Are Contracted Rates?
With a contracted rate, a shipper commits to a set freight rate with a carrier for a defined period of time, usually 6-12 months. The base rate is guaranteed not to change during that term, however the cost of the bunker (fuel) is reviewed once a quarter which can impact the contracted rate and the spot rate.
Contracted rates are based on forecasted market conditions and negotiated between shipper and carrier. Though higher than current spot rates, they offer protection when spot rates increase rapidly.
What Are Spot Rates?
Spot rates refer to current market prices at the time of booking. They are not fixed and can change week to week.
Shippers can take advantage of lower spot rates when the market is steady. However, spot rates leave shippers exposed to sudden rate hikes.
For example, the recent boom in spot rates is partly driven by blank sailings.
What Are Blank Sailings?
Blank sailings refer to cargo ships cancelling planned sailings due to low booking volumes. Carriers strategically blank sailings to reduce capacity and prop up rates.
With fewer ships sailing, available cargo space is reduced. This tightening of supply combined with steady demand drives spot rates upward.
Why Contracted Rates Are Likely To Be Best Now
Spot rates may be lower at the moment, but given the recent announcement from various shippers of blank sailings from the Far East, locking in contracted rates now give protection against large rate hikes.
Additionally, cheaper spot rates often means space is not guaranteed due contracted space taking priority. With volatile demand and blank sailings, carriers may still roll or cancel lower-paying spot shipments. Contracted rates generally come with guaranteed space.
The Bottom Line
Securing contracted freight rates provides stability and reliability during times of market unrest. While spot rates look temptingly cheap now, signing a 6-12 month contracted rate can protect your budget against further increases down the road.
