How Laufer’s fixed-rate contracts provide stability in times of uncertainty

As a result of the global pandemic and related lockdowns, the 2020 peak season brought many disruptions to international trade. Multiple events, including blank sailings, supply chain bottlenecks and surging imports, have forced many importers to reevaluate how they will prepare for the 2021 season. The standard ways of planning for the transportation of goods simply will not apply.

Many importers, including some of the big-box retailers, turned to Non-Vessel-Operating Common Carriers (NVOCCs) for additional capacity when they exceeded monthly volume commitments made with carriers as part of their annual service contracts. In 2021, we expect that trend to continue, as importers look to NVOCCs, like Laufer Group International, for fixed-rate contract solutions as one method to address the unpredictability of pricing and transit times in their supply chains.

What is an NSA (NVOCC Service Agreement) fixed-rate contract agreement?

An NSA is a contractual container volume commitment between a shipper/importer and an NVOCC—typically for a term of 52 weeks—that incorporates fixed pricing between specific port pairs as well as other custom accessorials, per diem allowances, bunker fuel clauses, and Peak Season Surcharge applicability. Typically, in an NSA, the rate levels are not subject to any General Rate Increase (GRI). NSAs are designed to help both importers and NVOCCs partner around expectations and allocations to ship forecasted container volume and manage costs more predictably throughout the year. The volume committed by both parties is called the Minimum Quantity Commitment (MQC).

Are NSAs available in all trade lanes?

The vast majority of successful NSAs and fixed-rate agreements are in the Transpacific Eastbound Trade.

What’s the typical duration of an NSA?

The typical NSA period is for one year, starting May 1 through April 30. There are occasions when NSAs can be agreed to prior to May 1 and even extend beyond April 30, but they are rare.

NSAs are designed to help both importers and NVOCCs ship forecasted container volume and manage costs more predictably throughout the year.
How do I qualify for an NSA?

NSAs are most successful
for importers who have
more consistent volume
flows throughout the
year, an ability to forecast
effectively, and want to
commit a minimum volume
above 200 containers.
There is no “cap” on a
volume commitment.

Why should shippers consider fixed-rate service arrangements on the Transpacific trade lanes in 2021, and beyond?

As a result of carrier consolidation, we expect ocean carriers to maintain consistent, higher spot market rate levels throughout 2021 by continuing to successfully manage capacity. This may cause wild fluctuations in market rate levels similar to 2020. Having a fixed-rate agreement can help shippers mitigate that risk and create a level of predictability in their volume flows as well as landed cost. It also enhances the partnership and level of support an importer can expect from an NVOCC. Additionally, as committed volumes increase, the NVOCC should be able to use carriers within multiple alliances to diversify shipping choices and further mitigate market risk. This is important as we expect carriers to continue their practice of blank sailings as demand fluctuates.

What are the benefits of using an NSA?

Market Hedge–Historically, importers have used annual contract agreements for cost predictability and savings. Decisions are typically made based on what percentage of “hedge” should be contracted in a given shipping season. Similar to an insurance policy, this can help cover for an anticipated amount of shipping. Shippers will have to ask themselves; how much volume am I willing to commit to? For example, if expectations are for a strong import market, then a shipper might sign a contract for a larger portion of their shipments between specific port pairs in order to maintain pricing for certain shipment volumes but maintain a portion of their anticipated container volume needs on the market so they can flex up or down when needed, or access express or premium services when their supply chain needs demand it. The chart below illustrates that 2020 contract holders fared better than those who used only the spot market, however, if you look historically the pattern that we saw in 2019 was far more typical of weekly fluctuations between market pricing and fixed contract pricing.

Predictability–Contract agreements can also provide predictability on service routing, transit times and risk mitigation through carrier diversification (in certain situations an NVOCC partner can help provide options for alternative routings for your shipments). Other accessorial costs such as equipment free time are typically more predictable when containers move under contract.

Flexibility–An NSA with an NVOCC offers shippers the ability to route shipments through contracted port pairs, through a specific commitment of cargo. Shipping container quantity requirements, defined as an MQC (Monthly Quantity Commitment) must be met on a monthly basis. Market conditions can change quickly, and as an NVOCC, we collaborate with our customers to maximize cost efficiency without jeopardizing commitments made through our contracts. Both parties within a contract— shipper and NVOCC—benefit from the written agreement rather than being entirely subject to the whims of market fluctuations. And, if you contract with an NVOCC and use that same NVOCC on the market, you achieve maximum flexibility and control within one visibility eco-system to simplify things for you, your suppliers and all stakeholders in your supply chain.

How can a shipper benefit from an NSA fixed-rate contract agreement in 2021?

Fixed rates for 2021 are anticipated to be drastically higher than they were in 2020. Beyond that, there is real uncertainty regarding the strength of the import market as well as how quickly infrastructure challenges we see today are alleviated. In such a time of uncertainty, an NSA can provide shippers a strong market hedge tool to manage volatility, enjoy predictability on rates and service, and if done right, enhance service flexibility. No two years in this trade are the same, so providing your organization a hedge and a higher level of predictability is essential to help you mitigate risk, improve your supply chain resilience, and keep you nimble to deal with whatever comes.

Let’s start a conversation.

With today’s current market conditions, introducing more predictability to your international supply chain can help you plan better for 2021. Laufer Group has been signing NSAs with our import customers for years. In fact, we consider it to be a key component of our strategy and customers’ success. Quite simply, we do it so well it’s in our DNA. To find out if an NSA fixed-rate contract would be right for you, contact Brian Martorano, National Director of Business Development, Ocean Import, or your Laufer sales representative today.