Opinion: Index-Linked Contracting Is Reshaping Ocean Freight - But Only If the Index Can Be Trusted

Volatility has become the defining characteristic of ocean freight markets. Over the past five years, container shipping rates have exhibited swings more extreme than many financial commodities, creating significant uncertainty for both carriers and beneficial cargo owners (BCOs).

In response, the industry is steadily moving toward index-linked contracting structures — agreements that tie freight rates to an external benchmark rather than fixed annual prices. This shift has the potential to fundamentally change behavior between carriers and shippers, reducing rollover risk and restoring predictability to long-term agreements. But the effectiveness of index-linked contracting depends entirely on one factor: the credibility of the underlying index.

For index-linked contracts or financial hedges to work, the benchmark must accurately reflect the price that cargo actually moves at. If the index diverges from real market rates, participants face material financial risk. A shipper hedging exposure against an unreliable index could find that its hedge gains do not offset its freight costs. A carrier using the same benchmark in contracts could similarly misprice capacity. In volatile markets, even small distortions compound quickly.

This is why the distinction between quoted-rate indices and shipment-based indices matters. Many traditional freight benchmarks are derived primarily from quoted rates — prices offered in negotiations but not necessarily transacted. In practice, a significant proportion of quoted rates never result in cargo being loaded, particularly during tight markets when space constraints lead to rollovers or renegotiations.

Shipment-based indices, by contrast, are constructed from system-generated records of completed movements. They measure what cargo actually shipped at, not what was discussed in negotiations. For risk management purposes, this distinction is critical: what matters to both parties is the price paid and received, not the price proposed.

Transparency is equally essential. In financial markets, price discovery depends on broad, open visibility. Equity prices, oil benchmarks, and foreign exchange rates are publicly observable because markets function best when participants share a common reference point. Ocean freight should be no different. When indices sit behind expensive paywalls, access to market truth becomes fragmented, undermining trust and limiting adoption of index-linked structures.

Governance also influences credibility. Freight indices shape billions of dollars of commercial decisions, so stakeholders must be confident they are not biased toward one side of the market. Balanced governance — including representation from carriers, shippers, and forwarders — and regulatory oversight are important safeguards against structural bias. Indices perceived to serve a single constituency risk limited acceptance across the broader ecosystem.

Finally, as index-linked contracting expands, the connection between freight indices and financial hedging tools is becoming more consequential. Shippers increasingly seek to manage freight exposure in the same way they manage fuel or currency risk. For hedging to function effectively, the index used in contracts must align with the index underlying derivatives markets. Convergence between physical and financial benchmarks enables consistent risk transfer; divergence creates basis risk that can negate hedge effectiveness.

The evolution toward index-linked freight contracting represents a structural maturation of the container shipping industry. It aligns incentives between carriers and cargo owners, reduces dispute frequency, and introduces greater discipline into long-term agreements. But the transition will only deliver these benefits if market participants converge around benchmarks that are accurate, transparent, and trusted.

In volatile markets, trust in the reference price is not a technical detail — it is the foundation of stability.

The opinions expressed in this article are those of Gordon Downes, CEO of NYSHEX. The Supply Chainer’s Insights are submitted content. The views expressed in this column are that of the author and don’t necessarily reflect the views of The Supply Chainer.