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Fixed Freight Rates versus Fluctuating Freight Rates

Posted on Saturday, February 27th by Pallet2ship logo

As a person seeking high-quality shipping services, dealing with fluctuating rates can be really distracting, to say the least, particularly in a context where reliability is known to be a key factor in this industry. Things get even more irritating during the peak seasons, when the shipping activity is the most intense, giving freight companies the perfect opportunity to rip their customers off. They tend to get equally irritating when shipping to or from the Asian continent, where freight rate fluctuations have almost become a lifestyle in the context of the trading industry. In this context, let us take a closer look at what exactly makes them so irritating. Let us take a closer look at fixed freight rates and how they benefit participants in the international shipping activity as opposed to their fluctuating counterpart.

Let us start at what fixed freight rates are exactly. For those yet to familiarise themselves with the shipping terminology, fixed freight rates are yearly rates that are not subject to any kind of additional charges, such as GRIs or PSSs, among others. Indeed, some carriers have learnt to take advantage of the whole peak season frenzy and claim their freight rates to be subject to PSS to increase their profits. However, they usually are not. It should be noted that fixed freight rates go way back on the profile market, yet they have struggled to become popular among shipping companies until recently. Unsurprisingly, they constitute the basis of fixed rate deals and contracts, which involve carriers being hired by importers to provide shipping services over the length of an entire year at costs that stay unchanged for that same amount of time. Thus, importers can plan their freight costs way in advance.

As expected, opinion on the practicality and efficiency of fixed freight rates is divided. While some stand in favour of this kind of rates providing importers with the opportunity to plan their freight costs, others compare them to the stock market, where an unexploited downward tendency can cause significant losses to be registered in the short run. In other words, they focus on the opportunities fluctuating market rates provide rather than on their drawbacks.

So, how do you choose? How do you decide whether you should commit to a fixed rate deal or not? Here are a few tips on how you should approach this kind of decision and a few particular aspects you should take into consideration. First of all, you need to do your homework. You need to research the offers and opportunities available on the market properly and then expand your research. This expanded research will include the number of new ships to be released for use by shipping companies throughout the year, for starters. Then, you need to assess the general economic indicators to get a better idea of the context within which you are about to carry out your shipping activity. Last but not least, you need to assess your own shipping needs and estimate the scale of the shipping activity you are to carry out over the length of one year. These are all factors you should not overlook in your attempt to reduce your freight costs, so do not compromise when it comes to your researching activity. You do not want to close a fixed rate deal in the context of the profile market going down, which is precisely why going through market analyses and forecasts for the current year is crucial. Similarly, a large number of new ships being scheduled for deployment on the market can justify an oversupply, which can further justify a drop in freight rates. Last but not least, fixed freight rate deals will most probably not work to your advantage your shipping activity over the duration of one year is not very intense.

Undoubtedly, one of the main advantages of fixed freight rates is that they allow you, as an importer, to make savings in the long run. However, at the same time, shipping lines are also looking after their own best interests, so you need to be careful not to fall victim to their endeavours to increase their profits. One of the ways to prevent that is to check your contract for last minute additions. These may force you into accepting your cargo to be shipped at different freight rates or even reject some of your shipments that have already been associated with a set of given fixed freight rates. Also, you may be encouraged to opt for market rates rather than for fixed freight rates for any number of reasons in order for the deal to be validated. Similarly, you may be faced with any number of problems upon reaching the end of your fixed freight rate contract. For instance, your contract may contain some hidden penalties applicable in the event of your not complying with the shipping volume estimated at the beginning of the contract. So, make sure you read your contract very carefully before sealing the deal.

While opting for market rates instead of fixed freight rates can provide a viable solution to your shipping needs, switching from one to the other is not really an option, at least not one you can get away with in the long run. Whether you choose to take your chances in the context of a fluctuating market or not is something you have to decide upon from the very beginning for carriers will not allow you to change your mind once you have initiated your contract. Or if they do, they will not give you the choice of a fixed freight rate deal in the future.

So, in order for you as an importer to be able to make the best choice as regards the freight rates to be applied to your shipments, you need to research your options properly. Otherwise, you are exposing yourself to great financial risks. In terms of fixed freight rates, your main advantages lie in the stability of your freight costs and the resulting possibility to estimate them in advance.

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