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The Death of MQC and The Growing Container Spot Market

The last decade has seen a drastic change in the way buyers and sellers of container freight interact. Pre-2008, the evergrowing container industry was predominantly structured by rigid contracts issued by the carriers.

OTI (ocean transport intermediaries), such as freight forwarder and NVOCCs (non vessel operating common carriers), had no choice but to sign these contracts in order to secure the best rates in the market. The contracts put the carriers in the driver’s seat by including penalty clauses that would severely hurt the OTI should they be in breach.

The Death of MQC and The Growing Container Spot Market

An MQC (minimum quantity container) clause would stipulate that in order for the OTI to get rates at a certain level, the OTI would need to commit to a minimum number of containers shipped during the validity of the contract. If a contract was signed with an MQC of 1000 TEU (twenty foot equivalent unit) and the OTI only booked 800 TEUs with the carrier, it would be considered a breach of contract and a penalty would be issued from the carrier. This way the carrier could create loyal customers that would pool all their business with the carriers they had contracted with.

What changed?

After the global financial tremors of 2008, the container industry experienced virtually the only non-growth year in its 40+ year history. The early 2000s’ optimism had spurred an explosive trend of new shipbuilding based on a projected growth that saw no obstacles. Carriers, for the first time in a while, had to agressively sell space on theirvessels.

What changed?They had enjoyed years of highly utilized vessels with more consistent container rates (Sure, the rates were dropping over time, but the carriers seemed to be able to control the market). With the global credit crunch and unstable financial markets the demand hit a ceiling and vessels were no longer full. At the same time the ship wharfs in Asia were moving full steam ahead, building larger vessels, trying to fulfill their order books that were all booked up for the next 3-­4 years. The carrier sales reps’ role changed from “the guy I play golf with”, to the guy who brings a donut, begging for freight.

This shift of power from the carrier to the customer had a major impact on the industry’s pricing procedures. With the financial noose starting to tighten, carriers started to ease up on the MQC requirement in the contracts, in a desperate attempt to fill up their vessels. The OTIs now had true bargaining power as excess vessel space started flooding the global container market and rates were dropping.

With the MQCs starting to ease, the OTIs were free to shop around for better rates, further pushing the rates lower. Now, you did not even need contracts to book with a carrier and the value of existing contracts was diminishing. In 2009, a “no-­body” could call certain carriers from a phone booth with a rate request for a container of household goods, and get a better rate that a well established OTI with a 5000 TEU MQC contract.

As long world trade continues its explosive growth, the spot market will rule the container industry.

The OTIs quickly realized what was happening in the market and started calling the carriers they had contracts with asking for spot rates lower than their contracted rates. The carriers complied in fear of losing the OTI and contracts were amended on a weekly basis to account for special provisions and deals. The spot race had really started to take off.

The role of contracts have moved from a being the “only” way to access rates and space on vessels, to an administrative tool for carriers to help them know who to send the invoices to. This is obviously not the case across the line, as larger OTIs and high volume end customers still have contracts that give them access to rates that are below the market. However for the majority of the market, the role of the contract has changed….perhaps for good.

The Death of MQC and The Growing Container Spot MarketAs long world trade continues its explosive growth, the spot market will rule the container industry. Even after the industry had more or less stabilized in 2011, the spot market trend had prevailed. The challenge for the carriers had become sales resources. Cutting costs, meant smaller sales teams and a greater dependency on the OTI to sell the space to the end customers. Although the access to information and data has made the industry increasingly transparent, the OTIs still sit on the rolodex of carrier relationships. They still funtion as the gatekeeper between the carriers and the actual business.

A lack of efficient spot market platforms is preventing the carriers from improving vessel utilization, and for end customers and and those with little or no carrier relationship, to access the low rates that are available. Carriers no longer have the margins to pay for a larger sales machinery that can cover the market. We are in the middle of a paradigm shift here. Old communication processess simply do not serve the industry and the rapid growth of the container trade needs better tools and sales channels for both carriers and customers.

Henrik Kjaereng has many years of experience in the global shipping and freight forwarding industry and is a managing partner of Loadex Group LLC.

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