Shipping Freight Rates: Spot or Contract?

May 16, 2024

Shipping Freight Rates: Spot or Contract?


Continental Logistics

The global logistics landscape will be difficult to manage and navigate without an understanding of shipping freight rates. With rate volatility becoming commonplace in the freight market, shippers and freight forwarders will be saddled with making the decision on whether to go with spot rates or contract rates.

Understanding the shipping freight rates is crucial for effective logistics and supply chain planning. Businesses can save money on freight shipping costs by smartly managing capacity between the contract and spot market.

The two shipping freight options have their benefits and disadvantages. As a rule of thumb, the spot rate offers flexibility to shipping operations, while contract rates offer stability.

In this article, we will explore the challenges, insights, and strategies involved in choosing between the two.

Choosing Between Spot and Contract Rates

Several factors must be considered when choosing between spot rates and contract rates. For instance, when shipping goods over a long time frame, locking down prices through contract rates might help provide stability across the contract duration. Spot rates might not suit a long-term strategy, as they can be very volatile — rising over a week and falling back the next.

The key to choosing between the two is determining how long the shipping operation will go on and how much volume will be shipped in that period.

Spot Rates

As mentioned above, spot rates are flexible and volatile, depending largely on market conditions, including fuel price, geopolitics, demand and supply, volume, and security.

Advantages of Spot Rates

  • Because it is flexible, the spot market has the potential to offer lower prices at several points during the year.
  • Volume and distance are bargaining factors. The more volume and the shorter the distance, the better the rate you can negotiate.
  • The supply chain or business can leverage strategic relationships to negotiate effectively.

Disadvantages of Spot Rates

  • It is subject to market conditions, and the wrong market condition can result in astronomical price increases.
  • The fluctuations make it difficult to plan the shipping process effectively.
  • Locking container space or allocation can be difficult because of the demand and supply dynamics.

Contract Rates

This shipping freight rate offers stable pricing for supply chain and shipping operations. It means that throughout the duration of the contract, the supply chain and business can expect the same price for all their shipping operations.

Advantages of Contract Rates

  • It offers long-term pricing solutions for logistics and supply chain operations.
  • Stable pricing allows the business to withstand shocks and fluctuations in market conditions, especially when such conditions cause skyrocketing freight prices.
  • It is best for routine cargo shipments and allows for effective planning throughout the year.

Disadvantages of Contract Rates

  • The shipper cannot break contract rates without upsetting their carrier partner, even when the prices are lower. This hamstrings flexibility.
  • Conversely, if market conditions continue to deteriorate beyond control, carriers can break the contract rates, especially if you do not enjoy a strong relationship. Price stability, an aspect of the contract market, might falter in such instances.
  • It may not be worth it if the shipper doesn’t ship a specific volume because the cost will not be favorable.

Market Shifts and Their Importance on Shipping Freight Rates

It is no secret that the freight market is highly volatile. A single shift in market conditions could bring benefits or disadvantages to the freight system. Here are some market shifts and how they impact shipping freights.

Truckstop's Market Demand Index increased by 9% in Q1

Truckstop’s Market Demand Index, up 9% year-over-year, is its first annual gain after seven consecutive declines. This means carriers will be eager to increase spot rates, especially considering their poor first quarter. This will negatively impact supply chains, as many have come to depend on the deteriorating market conditions to leverage lower spot rate prices.

Port of Long Beach Has Experienced Eight Consecutive Months of Cargo Growth

Shipping demands are steadily increasing, which means spot rates will be affected. Spot rates depend on the demand and supply dynamics. That is, when demand is low, prices are lower. As you can imagine, the increasing demands have compounded shipment delays and market pressure for many supply chains.

Carriers Prioritize Higher-Paying Spot Cargo, Frustrating Contract Shippers

In European trades, carriers prioritize shippers willing to pay higher prices for spot rates, leading to frustration among shippers. Shippers have locked in prices and marked that into their operational budget, with rate changes disrupting their entire supply chain. For the carriers, it’s just business.

Maersk Links European Restocking to a 9% Volume Growth

The shipping giant has linked European restocking to a 9% volume growth in e-commerce sales. The company is facing space tightening, and peak surcharges exacerbate challenges.

Optimizing Your Strategy

Key strategies will help supply chains effectively navigate between the two shipping freight rates in today's volatile logistics and trucking market. With these strategies, shippers can ensure seamless shipping operations and more optimized supply chain management.

Tailor the Shipping Operation

Doing this effectively will mean evaluating shipping volume, cost tolerance, and delivery timelines. This will allow the supply chain to find the best solution and rates at any point.

Consider A Hybrid Approach

It doesn’t have to be one or the other when choosing freight rates. A business can leverage the two based on the situation. It can leverage contracts for stable volume while taking advantage of spot opportunities during low-demand periods.

Build Strong Partnerships

Strong partnerships mean the business gets priority treatment with carriers. The best way to do this is by partnering with logistics providers like Continental Logistics with the long-term view in mind. This means more price flexibility, space allocation, and overall priority service.

Navigating Shipping Freight Rates With Continental Logistics

In a volatile market, having a great carrier can make the difference between success and failure for your entire logistics and supply chain operation. With Continental Logistics, you can easily navigate the North American trucking industry and enjoy the best shipping freight rates.

Continental Logistics builds its operations around you and your business. We’re here to work behind the scenes handling your transportation needs so you can focus on what’s important — running your business. We ensure that your business remains competitive logistically by adapting to industry changes and trends, managing carriers, and staying compliant with retailer and distributor routing guidelines. Connect with us today.

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