Over 2000 container industry players descended upon TPM at Long Beach, end February, where one key theme I took away was the hesitancy to embrace price transparency. Existing benchmarking providers had mixed reviews depending on delegates’ interpretation of transparency.
There was no true winner but when entering negotiations with a data point, on the potential real market rate, compared to market sentiment can only be a good thing for negotiating parties. It builds trust and potential long term relationships, not just focusing on price but ensuring parties have “skin in the game”.
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Pricing structures are similar to mariners navigating their ships through the perils on the sea. To get from point A to B in an efficient manner you need to use all the sources available. You would not try to navigate an iceberg field with just a radar screen, you need to use your eyes and others’ as well otherwise you enter negotiations with tunnel vision.
A combination of traditional inefficient negotiations between both parties and index linked pricing structures provide a more effective and adaptable mechanism for the fast paced supply chain the container industry operates within.
To take full advantage of these real time benchmarking platforms you need an outlet to deploy your efficient pricing strategy whilst mitigating your business exposure on an independent index. Index linked contracts are typically said in the same breathe as bringing transparency to our industry, scary word when taken literally.
The container industry already uses index linked contracts for a few routes but the potential to grow this part of the pricing strategy remains uncertain.
Highly transparent price assessment methods allow market participants to utilize indexes knowing that an accurate consistent representative market rate can be normalized or derived in your contract negotiations on a spot or longer term basis.
Subscribers can submit evidence that the assessed price is not in accordance with the publicized methodology, if proven then a correction will be made to ensure that the index linked contracts maintain the market rate.
It’s about establishing industry standards collectively, including all parties whether active or passive to provide common product specifications, terms of trade and logistical norms that evolves.
The standards become accepted market behavior and hence greater market efficiency and the emergence of useful pricing benchmarks.
Price transparency is not about giving away your trade secrets, it is just stating your traded price for one trade at a point of time. The Oxford dictionary uses the analogy transparency is like ice.
Ice is not truly transparent, as an Officer of Watch in the Royal Navy navigating a warship from the Falkland Islands to South Georgia, you passage within the Antarctic Convergence Zone passing close to magnificent ancient icebergs. They truly humble you knowing that underneath the surface they are twice as long and wide.
Market participants only have access to the tip of your iceberg, the price, not your pricing strategy.
Problems arise when unclear methodologies or unregulated indexes are used in price discovery. It is comparable to transiting the Southern Ocean and a huge wave confronts you where you can’t see the crest of the wave, you brace yourself for the impact, before your ship is engulfed by the wave and hope you emerge the other side unscathed.
Unclear transparent methodologies can lead to the same consequence as physical markets are complex and non-standardized.
An independent provider like S&P Global Platts can offer stability for the container market to embrace the container revolution and build the foundations towards an oil benchmark equivalent over the coming years together.
It is not a new phenomenon that price transparency brings efficiency to a marketplace; Platts has been providing daily prices on commodity markets since the 1920s.
In 1992 when Platts launched the Market-On-Close (MOC) methodology there were sceptics, but industry players still embraced the revolution and is at the forefront of leading industry benchmarks.
The container market has quite a few challenges ahead of it, including uncertainty in bunker prices, pressures from supply of tonnage and debt, so this might be the perfect time to embrace change.
Independent benchmarks that reduce risks, create transparency of costs, make negotiations simpler and quicker and put the customer into focus might just be the right remedy.
Platts blog series “Container Index Revolution” will explore how and when carriers, end-users and logistics companies would use an index linked contract and why this would actually be a good idea.