Renege on a cargo contract in tanker or dry bulk shipping and your counterparty will attach your assets and drag you into arbitration. Containerized freight contracts are different — more like Third World traffic rules (that red light you see is just a suggestion). Promised cargo might not show up. Ships might not load the cargo that does.
Efforts to change this are now gathering steam, particularly in the wake of massive coronavirus disruptions to containerized trade. A rising number of ocean container deals, whether spot or contract, are incorporating nonperformance penalties.
More evidence of the trend emerged Thursday. The New York Shipping Exchange (NYSHEX) — a startup providing a two-way enforceable contract solution, initially in the trans-Pacific trade — announced $13.5 million in additional funding, led by NewRoad Capital Partners.
NYSHEX will use the new funding to bring more retail shippers into its system and to expand into Europe.
In an interview with FreightWaves, NYSHEX CEO Gordon Downes maintained that enforceable terms allow “carriers to optimize their equipment and network to provide better service and allow shippers to optimize their supply chain.”
“If you convert a classic vicious cycle [broken promises from both shippers and carriers] into a virtuous one, everybody benefits.”
A step toward commitment
“The reason contracts in the container-shipping industry are the way they are goes back to legacy decisions, norms and customs established in the liner conference era,” maintained Downes.
“Generally speaking, there’s resistance to change, so it takes time, effort and energy. But the container industry is going through a transformation,” he said, asserting that enforceable contracts “are growing in adoption.”
NYSHEX is a multi-carrier solution. In parallel, single-carrier solutions are moving ahead rapidly — most notably Maersk Spot.
The Maersk Spot online platform handled over 40% of the liner giant’s second-quarter spot bookings. Maersk CEO Soren Skou predicted that this number will eventually approach 100%. He also predicted that other liners will follow suit as “table stakes.”
“The big benefit for us is that it’s a commitment product,” said Skou. “That means the customer makes a booking and actually has to show up with a container or pay a penalty.”
Maersk achieved the surprisingly high 40% penetration rate despite Maersk Spot being unavailable to U.S. customers, including the American retail importers that have driven spot rates to record highs.
Maersk has yet to secure Federal Maritime Commission (FMC) approval for its spot platform. But a Maersk spokesperson revealed to FreightWaves: “All tracking well. A work in progress and expect news to report in the next 30 days.”
Overall, the numbers are still small and it remains to be seen whether interest in enforceable contracts is secular or cyclical. But even so, with Maersk Spot’s FMC approval assumedly nigh and NYSHEX delving into the retail-centric trans-Pacific eastbound trade, it seems like more enforceable ocean contracts lie ahead.
The COVID effect
Import orders were rapidly rescinded when the coronavirus struck. Carriers “blanked” (cancelled) an unprecedented number of sailings. Large numbers of boxes on contracts were “rolled” (pushed to a future sailing).
Perfect timing for a solution like NYSHEX that improves reliability.
“I would hate for anyone to think that NYSHEX is only growing because of COVID. Because that is certainly not the case,” said Downes when asked about the coronavirus effect. “We were growing quickly even before COVID hit.”
The volume of containers transported under NYSHEX contracts totaled 61,600 twenty-foot equivalent units (TEU) in 2019, more than triple 2018 volumes. First-quarter 2020 volumes hit a new quarterly record at 28,000 TEU. Then second-quarter volumes surged to 41,800 TEU. Downes confirmed that third-quarter volumes will be higher still.
Downes does see COVID upside for the attractiveness of binding contracts. “Pre-COVID, many shippers in particular looked at their contracts and said, ‘These aren’t ideal but so far they’ve served us reasonably well.’ What COVID has done is make a lot more shippers realize that their contracts are not as binding as they expected, which leaves their supply chains exposed.”
Complimentary or competitive?
There are six carriers currently participating in NYSHEX: CMA CGM, Hapag-Lloyd, Maersk, ONE, COSCO and HMM. This covers all three of the east-west alliances.
The initially designed penalties were 35% of the contract price for trans-Pacific westbound, 25% for eastbound — although these are now more customizable based on carrier-shipper negotiations. NYSHEX determines if there is a default based on detailed rules promulgated by the member council of carriers and shippers. Carriers pay $5 per TEU for shipments using NYSHEX contracts; shippers pay nothing.
An obvious question for NYSHEX is: What if all carriers created their own enforceable-contract systems? Isn’t it a zero-sum game? Why is the surging volume of Maersk Spot good and not bad for NYSHEX?
“The fact that Maersk Spot is creating more enforceable contracts is a wonderful tailwind behind the movement to improve shipping reliability through more effective digital contracts and we’re very grateful they’re moving in that direction,” answered Downes, who pointed out that Maersk itself is very supportive of NYSHEX.
“NYSHEX was the first to highlight the need for two-way enforceable contracts. For me, Maersk Spot is a valuable proof of concept that the industry is starting to embrace this and to recognize the challenges of the traditional ways of contracting.
“The fact that the largest carrier in the industry is starting to push towards this new way of doing contracts creates an enormous amount of momentum. So it’s not a bad thing. We see it as a very positive thing.”
Different products for different shippers
“NYSHEX is intentionally very different from Maersk Spot,” he continued. “By definition, a carrier could never offer a multi-carrier solution, so NYSHEX is complementary [to single-carrier platforms].”
The NYSHEX platform offers the same processes for each carrier; single-carrier platforms have different processes, equating to time savings via the use of NYSHEX.
Another key difference: “The entire value proposition of NYSHEX hinges on one important point — NYSHEX is neutral and impartial,” said Downes. “We’re trying to ensure the shipper and the carrier have a fair outcome in their enforceable contracts. That’s a very different value proposition from a carrier that offers its own enforceable contract whereby the carrier may be the sole determinant as to whether or not it is the shipper’s or the carrier’s fault for not fulfilling the contract.”
Meanwhile, Maersk Spot is for spot deals, whereas “NYSHEX is [for] more longer-term contracts. Virtually all of the contracts on NYSHEX now are multi-week,” he said. Many incorporate multiple origins and destinations. “It’s for the shipper who says, ‘I don’t want to have to log into Maersk Spot every single week and look at the price. I just want to sign one contract for the next month or the next quarter or the next 12 months and fix a price.’”
The average volume per NYSHEX contract is now near 1,000 TEU versus an average of 466 TEU in the first quarter. Downes said the jump is specifically the result of users moving toward longer contracts.
Next phase of expansion
NYSHEX raised $13.5 million in its Series A financing round in 2017. Investors included Goldman Sachs, GE Ventures, CMA CGM, Hapag-Lloyd, Collate Capital and New York Angels.
The latest round of $13.5 million includes several of these original investors in addition to Arkansas-based NewRoad Capital Partners.
The vast majority of NYSHEX’s trans-Pacific contracts have been for the westbound trade. More than 90% of third-quarter volumes were westbound. The new investment could change the mix, bringing NYSHEX into more shipper markets on the eastbound lane.
“We started off with the U.S. agricultural sector and then expanded into recyclables and other segments on the westbound trade. Now that we’ve raised more capital, we can invest more in some of the more complicated [eastbound] segments, for example, retail.
“In the very beginning, we invested heavily in building carrier integrations and tools and processes to provide for the way carriers do contracts and track fulfillment and the expectations that arise,” Downes said.
“In the past few years, we’ve started to build more and more technology around the needs of shippers. The next focus is the retail shipper segment and we’ll be investing in a lot of technology to service that.”
On the future geographic expansion into Europe, he explained, “We currently have a presence in the U.S. and Asia and don’t have a presence to cover the Europe trade. For the retail segment, it’s very important for us to offer the scope they need and a lot of retailers are operating on both the trans-Pacific and Asia-Europe, therefore we need to provide that geographic footprint.
“We know many retailers need support with their service contract compliance. We do have a few early adopters in the retail segment that are using NYSHEX today and that’s what gives us the confidence to make the investment in that sector.” Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON CONTAINER SHIPPING: Chinese container factories sold out until next February: see story here. Container rates are on fire; how can you invest in that? See story here. Red-hot ocean rates could spark government intervention: see story here.