The consistent mismatch between the demand and supply capacity of freight rates has given rise to two types of rates, the spot rates and long term rates.
What are spot freight rates?
A spot freight rate is a one time freight rate applicable for sea or air shipment and are valid for a particular shipment only. Spot freight rates are capacity driven and there is no commitment for such rates. Spot rates depend on various factors namely demand in that region, oil prices, bunker prices etc. Since the freight rate is decided on that particular day, it is to be counted as spot rate. It must be noted that these spot freight rates carry inherent risk with them, since they are quite volatile and depend on the market condition at that particular time.
What are contractual freight rates?
A contractual freight rate is fixed on with a carrier and is considered for a defined time period (Usually, year long). Though rates on contractual basis have less risk and better service, there is gradual surge in spot rate in past few years to capitalize in on the competitive market.
How spot freight rates work on Shiplyst?
Shiplyst is an online freight procurement marketplace. Our platform enables you to benchmark your contract rates against the spot rates in real time, to get a sense how much you are saving or if you are paying more on your trade lanes. Shiplyst also allows you to upload and manage your contract rates while giving you the spot market comparison side by side.
So which are more preferable- spot or contract?
It depends. If you have visibility and predictability about your supply chain, it is better to go for contractual freight rates since it brings stability and certainty. For shipments that cannot be planned well in advance one can go for Spot freight rates.
With a freight contract, a shipper or cargo owner can forge a long term relationship with the freight seller/carrier and hope to get better service. In the past few years, ocean freight industry has been suffering due to twin problem of over capacity and slowing demand. As a result, the spot freight rates have been consistently coming down. It might happen that the spot rates that you receive for the shipment may produced savings compared to contractual freight rates, but many shippers consider contractual rates for long time basis. Carriers also give preference to shipments that are booked on contract rates. If you negotiate your contract freight rate right, you can avoid peak season (PSS) and general rate increase (GRI) and such other surcharges on contract rate that are usually applied on spot rates during high volume season.
Can you use both Spot and Contract freight rate?
In most cases you can. Depending on your contract terms, relationship with the freight seller/carrier, trade lane and volume, you may be able to move some of your shipments on spot rate even though you have a contract rate filed. You should think of exercising such option when the spot rates soften and fall below your negotiated long term contract freight rates. However, a spot rate may not always produce savings. It is important to continuously track freight movement. A freight marketplace such as shiplyst.com can help you benchmark and track spot market rates across various port pairs.