Derivatives to stabilise container market

Container derivatives experts have hit back at shipping line claims that the fledgling market could exert a destabilising effect on the container transport industry.

Arthur Worsley, Container Swaps Broker at Freight Investor Services (FIS), said that carrier claims that derivatives would destabilise the market and that carriers should sign long-term contracts in order to bring stability to the industry was not always true.

Worsley pointed out that if carriers sold slots on a service at the wrong price on a long-term contract, they could lose money and face having to break the contract with its customer.

And the same applied to shippers if they signed up to a long-term contract at the wrong price.

This would have the affect of damaging customer/supplier relationship, an example of which recently hit the headlines when it emerged that UK retailer Argos is taking Maersk Line to court for allegedly reneging on contracts.

Worsley said: “A poorly managed contract can quickly jeopardise even the longest of carrier-shipper relationships.

“At risk are the cost, time and effort placed in developing the client-supplier relationship and mounting tensions between carrier and shipper.

“In a worst-case scenario, the carrier may lose a good customer as well as guaranteed volume and revenue.

“The customer may find themselves in the daunting position of searching for a new carrier, losing relationship-specific service benefits and reduced costs that may have been earned or negotiated over several years.”

Container derivatives, or swaps, where someone buys space on a paper market at a different price to the amount you paid on the physical market, would help elevate this risk.

Worsley said that a carrier losing money on a contract had four choices:

• It can default on the contract and risk losing the customer to another line
• Renegotiate the annual rate and risk losing the customer to another line
• Introduce a surcharge but risking upsetting its customer
• Or, honour the contract and buy container swaps contracts in order to hedge against the risk of increase in spot market box-rates.

Last week, Maersk Line CEO Eivind Kolding told IFW’s sister publication Lloyd’s List that a paper market would damage the container trades by exacerbating price swings.