Shippers Turn to Index-Linked Contracts to Navigate Volatile Ocean Freight Market

Ocean freight markets have been defined by sharp swings between spot and contract rates in recent years, leaving both shippers and carriers exposed to volatile costs and unreliable service levels. Traditional fixed-rate contracts are increasingly difficult to enforce, as incentives shift depending on whether the spot market moves above or below contracted pricing.

Gordon Downes, CEO of NYSHEX, explained that these mismatches often drive behaviors that undermine long-term planning. “When spot rates fall below contract rates, shippers are tempted to shift volumes to cheaper spot options. Conversely, when spot rates spike, carriers favor lucrative spot bookings over honoring fixed-rate agreements,” he said. “This dynamic strains relationships and causes rollovers, last-minute surcharges, and service breakdowns.”

Aligning Incentives Through Index-Linked Contracts

Index-linked contracts are designed to solve this misalignment by tying freight rates directly to a trusted market index. As the index fluctuates, the contracted price automatically adjusts, keeping both parties aligned.

According to Downes, the key is trust in the index itself. “When both sides agree on a spot rate index they believe accurately reflects market conditions, the relationship shifts from adversarial negotiations to true collaboration,” he said. “Shippers gain reliable space, and carriers gain predictable cargo flows without the constant renegotiation of rates.”

Gordon Downes, CEO of NYSHEX

The NYSHEX Freight Index (NYFI) is one such benchmark, designed to provide transparent pricing data that can serve as the basis for these agreements. With an index in place, shipping contracts can function more like financial hedges, helping both carriers and beneficial cargo owners (BCOs) reduce risk and improve forecast adherence.

Procurement Challenges and CFO Concerns

While the benefits are clear, Downes acknowledged that making the switch from fixed-rate to index-linked contracts is far from easy. Many procurement teams are structured around annual bidding cycles and are evaluated on their ability to “lock in” savings. In today’s market, that mindset is increasingly unrealistic.

“Most freight contracts aren’t truly reliable in the way CFOs expect,” Downes said. “The volatility of the container market means fixed rates can’t guarantee stability. That’s why it’s critical to educate internal stakeholders and finance teams about how index-linked contracts work.”

To manage potential cost swings, companies can use financial tools such as container freight swaps and options. Global banks like Goldman Sachs and Citi are already offering these products, with exchange-traded futures expected to follow soon, giving CFOs a way to hedge exposure when markets rise.

The Path Forward for Shippers and Carriers

As ocean freight markets remain volatile, tools like index-linked contracts and performance monitoring platforms are becoming essential for supply chain leaders who need to reduce rollover risk and maintain reliable service.

By embracing transparent indices and modern hedging strategies, shippers and carriers can replace reactive negotiations with proactive planning. While the transition requires changes to procurement processes and internal education, the payoff is a more resilient and predictable global shipping network.