The World Shipping Council, whose members account for roughly 90 percent of global liner vessel capacity, urged the U.S. Federal Maritime Commission to abandon its plans for an agriculture export commodities-based rate index.
The FMC proposed developing an index beginning in March, and posted a notice of inquiry in late May, with a deadline of July 8 to submit comments
But WSC said Thursday the “commission’s establishment of a rate index for certain cargoes subject to the Shipping Act would violate the service contract confidentiality provisions of the Act and the commission’s own current regulations. That fact alone requires that the rate index proposal be abandoned."
The WSC added it saw no reason why the FMC should create rate indexes for ocean shipments “when the government has not done so for any other transportation mode.”
Finally, WSC argued “there is no explanation of how the proposed index would reduce the rate volatility market conditions that its proponents contend it is designed to alter.”
The release of rate data that is currently protected by confidentiality clauses under the 1998 Ocean Shipping Reform Act (OSRA) runs counter to that regulation, WSC argued.
“The purpose of an FMC rate index would be to provide transparency of shippers’ rate levels on an ongoing basis, and this purpose is inconsistent with the applicable statute and existing FMC regulations,” the council said in its comments to the FMC. “The purpose of OSRA was to create a new federal regulatory structure under which contract terms that disclose sensitive business information, especially contract rate information, were to be shielded from public disclosure. Under this regime, there is no role for the FMC to inform the market of the level of, or changes in, market rates. That is not a legitimate function for the FMC. Aggregating service contract rate data by commodity would not alter this fact.”
When the notice of inquiry came out in late May, Philip Damas, director of Drewry Supply Chain Advisors, had an opposing opinion.
“We think that, if aggregated, the indices will not breach confidentiality,” he told American Shipper.
The WSC argued an export rate index would benefit derivatives brokers and freight traders more than shippers and carriers. The index could ostensibly be used by shippers and carriers to build index-linked freight contracts, but just as likely be used by brokers and traders to sell freight contracts on the derivatives market as a way for both sides to minimize volatility.
The council said the FMC’s federal directive is not to promote the interests of such brokers. It also said if the goal of the index is to reduce market volatility, why would brokers be pushing for the development of an index when increased volatility would conceivably compel carriers and shippers to turn to derivatives markets?
Lastly, the WSC said carriers are already motivated to build service contracts on a long-term basis – in the case of exporters, for longer than 30 to 60 days, as mentioned in the FMC’s notice of inquiry – if such contracts are profitable for the carrier.
“Shorter term contracts exist by the agreement of the parties, and/or their inability to agree on the terms of a longer term agreement,” the council said. “It would be economically illogical for a carrier to be unwilling to ‘increase the certainty of an exporter’s transportation costs’ and ‘lock in a rate that is valid for more than 30 to 60 days’ if the rate will yield a sufficient financial return for the carrier.” - Eric Johnson