By Eric Huang    Photo：CANVA

April is the season when shipping companies, direct customers, and freight forwarders negotiate their contracts for trans-Pacific routes. The market becomes flooded with various rates, often confusing customers. So, how are these trans-Pacific service contract prices determined? What are the different types of contracts? Let's delve into the details.

A Service Contract (S/C) for the trans-Pacific route is an agreement between the carriers and the shippers to transport a specified number of containers over a set period at one or more rate structures. Shippers can secure more favorable rates due to the high volume of containers they ship. However, if they fail to meet the Minimum Quantity Commitment (MQC), they will face penalties. The Federal Maritime Commission (FMC), an independent federal agency, oversees these contracts to ensure they provide competitive and efficient ocean transportation services for U.S. exporters, importers, and consumers. According to the FMC's website, it ensures this through the following measures:

Reviewing and monitoring agreements between ocean common carriers and marine terminal operators (MTO) serving the U.S. overseas trade to prevent significant cost increases or service reductions.

Maintaining and reviewing confidentially filed service contracts to prevent adverse effects on shipping.

Providing a forum for exporters, importers, and others in the shipping industry to seek relief from obstructive shipping practices or disputes.

Ensuring public availability of common carriers' tariffs and charges via an automated tariff system.

Monitoring rates, charges, and rules of government-owned or -controlled carriers to ensure they are just and reasonable.

Taking action to address unfavorable conditions caused by foreign government or commercial practices in U.S. foreign shipping trade.

Trans-Pacific freight rates must be reported to the FMC according to their regulations, with violators facing substantial fines. These contracts typically last one year, from May 1st to April 30th of the following year. Thus, every April, shipping companies and shippers or NVOCCs renegotiate their agreements.

Based on the contracting party, trans-Pacific contracts can be divided into Beneficial Cargo Owner (BCO) contracts and Non-Vessel Operating Common Carrier (NVOCC) contracts. BCO contracts generally offer better rates but are only applicable if the contracting party is listed as a consignee or shipper on the Master Bill of Lading (MBL). NVOCC contracts, on the other hand, are signed by freight forwarders who can consolidate shipments from various BCOs. However, NVOCCs must be registered with the FMC and listed as consignees or shippers on the MBL.

There are several pricing models for trans-Pacific contracts, with the most common being FAK (Freight All Kinds), LTA (Long Term Agreement), and Bullet Rates. The FAK rate is a uniform rate, regardless of the type or value of the cargo, and is the most basic and common pricing standard in these contracts. This rate can be adjusted by the carrier at any time, hence also known as the Spot Rate. However, hazardous and temperature-sensitive goods are excluded from FAK rates.

The LTA rate, or fixed rate, is offered for a specific period for certain types of cargo shipped by a specific customer. The carrier cannot adjust this rate, also known as the NAC (Name Account) rate. Shippers favor this model as it allows them to accurately estimate shipping costs for a given period, facilitating price policy formulation. However, carriers impose stricter conditions for LTA contracts, requiring a guaranteed shipping volume and careful monitoring to ensure the rates are not misapplied to non-specified customers or cargo types.

Bullet Rates are special rates offered for a specific period and cargo type, usually based on the carrier's route planning and the customer's shipping needs. Before the COVID-19 pandemic, carriers were keen to use Bullet Rates in cooperation with freight forwarders to retain large BCO shipments. However, post-pandemic, carriers often prefer direct BCO contracts, making Bullet Rates less common.

While different trans-Pacific pricing models offer varying rates, in times of tight market capacity, carriers typically reduce the supply of space available for discounted rate models. Consequently, apart from FAK space, other rate models' space might be squeezed, resulting in contracts being in place but no space available. Therefore, when choosing a freight forwarder, exercise caution to avoid being lured by lower rates only to face the dilemma of unavailable space.

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