Supply Chain

Hedging contracts in supply-chain chaos

Could shipping be treated as a commodity and traded on an index?
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Karl Hendon/Getty Images

· 3 min read

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Supply-chain disruptions have driven up costs over the past year, and it’s not clear when, if ever, things will get back to normal. And while companies might not want to overhaul their entire supply-chain strategy, renegotiating or revisiting contracts may be an avenue to offset unpredictable costs, Ian Arroyo, CCO of Freightos, a global freight marketplace, told CFO Brew.

“CFOs historically have been very focused on predictability around costs,” Arroyo said. “A CFO has been very comfortable, historically, pre-Covid, with settled long-term contracts, because then they know that they’re paying X dollars per container, or X dollars per cubic meter, period, end of the story for the rest of the year, and so that’s predictable.”

In an effort to mitigate some of the uncertainty, companies have turned to near-shoring and onshoring to try to decrease risk, said Steve Gallucci, Deloitte’s global and US CFO program leader, but long-term contracts could be holding companies back from making quick changes based on the ever changing microenvironment, Arroyo told CFO Brew.

“[CFOs] are leaning in to try to have a better understanding with respect to data, where the supplies are coming from,” Gallucci said. “There’s a clear investment in improving supplier data collection. Coinciding with that, there’s a determination that you have the right metrics in place to be able to measure the supply chain. For example, we’re seeing [CFOs create] a meta index that tracks the overall risk of the supplier network.”

Arroyo told CFO Brew that Freightos has been working with the Chicago Mercantile Exchange to give companies “the ability to hedge [their] container risks” by trading FBX on the CME. “Container shipping is really just a commodity,” Arroyo said. “So why haven’t CFOs historically done hedging on those containers?”

What does hedging container risks look like in practice? Eytan Buchman, chief marketing officer at Freightos, told CFO Brew via an emailed statement that “companies who want to budget their future spend on shipping (or service providers who want to budget their future revenue from selling shipping) can buy (or sell) futures which will compensate them if the future market price is different from their expectation.”

A cargo provider might agree to sign on for its own forecasting metrics, guaranteeing a certain level of future activity (and possibly some reassurance that the global shipping industry will continue to grow).—KT

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