Minimum Quantity Commitment (MQC) in Shipping Contracts: A Guide for Businesses

Minimum Quantity Commitment (MQC): A service agreement wherein a BCO and VOCC commit to shipping a certain amount of cargo over a predetermined length of time at a predetermined level of service at a predefined and mutually agreed freight rate.

A minimum quantity commitment (MQC) is this promise from the BCO to ship the defined and mutually agreed upon volume.

Generally speaking, the Minimum Quantity Commitment serves as the foundation for calculating the freight rate and giving carriers the data they need to reserve cargo space for the duration of the contract.

Most of the time, the business is unpredictable, thus the BCO might not be able to forecast the volume they can commit to. Nonetheless, a tolerance level might be decided upon after the carrier and the BCO have a consensual conversation.

A legally binding agreement with precise terms and mutual obligations between the parties involved is called a service contract. This contract depends on the MQC, and both parties have to abide by it.

Thus, in exchange for the lower contractual freight rates, the MQC provision in the contract stipulates the minimum quantity of cargo (or the number of containers) that the shipper is required to convey with the carrier throughout the term of the agreement.

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The shipper gains from entering into a contract with a MQC in the following ways:

  • Assured space and equipment: The fundamental basis for signing a contract with MQCs is to confirm that the carrier will provide the space necessary to transport the agreed-upon volumes. This gives shippers assurance about the availability of equipment and space on vessels.
  • Stability in freight prices: Shippers are guaranteed stability in freight rates, leading to relatively consistent overall transport costs, because rates are negotiated for the duration of the contract (and cannot be amended, save in the case of force majeure events or emergencies). This makes it possible for shippers to appropriately account for supply chain expenses and set their product prices accordingly.
  • Limited exposure to increases in accessorials and surcharges: The amount of surcharges, such as the Terminal Handling Charge (THC) or the Bunker Adjustment Factor (BAF), is usually written in contracts. This protects the shipper in case the carrier’s costs go up because of the activities that the surcharges apply to. For instance, the carrier may consent to a lesser THC in the contract in the case of Terminal Handling Charges (THC), when the carrier occasionally marks up the quantity.
  • Similar to this, BAF levels are influenced by oil and bunker prices, which typically rise (except from recessionary periods). As a result, most contracts provide that the BAF assessed will be adjusted if oil prices rise above a predetermined threshold. In a sense, this protects the shipper against BAF rises since it suggests that the carrier will absorb small increases in bunker costs (while also holding onto the flexibility to adjust the amount of the BAF if excessive price movements result in an abnormally higher increase in bunker expenses).
  • Optimising inventory management: Shippers may be confident in the volume, regularity, and speed of their deliveries of raw materials, components, and completed items to their production plants or consumer markets when they have assured space. Because of this, shippers are able to schedule their inventory levels, reorder levels, and minimum reorder amounts in a way that prevents them from hoarding extra inventory or from placing orders for more (or earlier) than is required to restock supplies. This reduces the expense of keeping inventory on hand and enhances cash flows while lowering the chance of stock damage and obsolescence. Additionally, this aids shippers in finding the ideal balance between inventory management techniques, such as JIT (Just in Time) and JIC (Just in Case).
  • Supply chain reliability: With fewer interruptions and a decreased chance of errors, all of the aforementioned elements substantially support end-to-end supply chain planning. The supply chain is more dependable and strong when shippers have more control over it and can more accurately predict costs and delivery times. This gives the company broad advantages and may provide them a competitive edge.

From the standpoint of the Carrier

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While the spot market offers chances to maximize profits and yields, contractual MQC cargo guarantees the carrier business and space usage.

Thus, MQC volumes guarantee a minimum level of space utilisation that is acceptable and give carriers income visibility, putting them in a strong position to aggressively sell the remaining available space on the spot market.

shipping crates
MQC volumes can assist carriers with CAPEX allocation and network optimization as well.

Thus, carriers try to find a middle ground between guaranteeing sufficient cargo obligations and providing sufficient room to accommodate spot freight.

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The goal is to guarantee that the MQC supports the contractual rates provided and that the total revenue is high enough to support the carrier’s operations financially.

Liquidated Damage

Liquidated damages or the fine a shipper must pay if they are unable to deliver the contracted volumes, are connected to the idea of MQCs. The deficiency in MQC multiplied by the rate of liquidated damages determines the total amount the shipper is responsible for paying as liquidated damages. Liquidated damages are levied as a specific pre-agreed sum per container.

The liquidated damages clause is included to compensate the carrier for the opportunity cost of the blocked space that was ultimately unused because the shipper was unable to deliver the committed volumes and to serve as a deterrent to prevent shippers from offering unreasonably high volumes in exchange for lower freight rates.

In actuality, however, the degree of the shortage, the state of the market, and the relative negotiating strength of shippers over carriers all play a significant role in the implementation of liquidated damages and the shipper’s liability for missing MQCs.

How A Container Ship Transports Its Cargo
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It is conceivable that the carrier will ignore the shortage in situations where it is not particularly large, where shippers have the upper hand in the market, or where keeping the shipper’s business is essential to the carrier.

As it allows them to sell the space thus freed at the higher spot market rates and maximize revenue (as had the shipper delivered the MQC volumes, the carrier would have been legally obligated to carry them at the agreed freight rates, thus decreasing space available for higher-yielding spot cargo), carriers would be more receptive to overlooking MQC shortfalls in a buoyant bull market and high freight rate environment (such as those seen in post-Covid, in 2021 and 2023).

Things to take into account while calculating MQCs

It is critical that the MQCs decided upon are reasonable for both the shipper and the carrier. A legal obligation is placed on both the shipper and the carrier to ensure that the volumes materialize and that the carrier has enough space and equipment to accommodate the MQC volumes. The carrier offers contractual freight rates depending on the volumes the shipper commits to, among other things.

Following is an explanation of some crucial elements to take into account while calculating the MQC:

  • Total business or volumes under the shipper’s control: Before agreeing to a MQC with the carrier, the shipper must assess his export potential and manufacturing capability. To mitigate the hazards associated with an overreliance on a single carrier, the shipper may choose to distribute their quantities across two or more carriers, provided that the volume is sufficiently high to entice the carrier to give favorable pricing.
  • Capacity and Trade lanes/port corridors involved: Prior to accepting the MQC volumes, the carrier must examine their shipping network and capacity. This is done to guarantee that the carrier can accommodate the MQCs and that the freight rates are set with consideration for the supply-demand imbalance, equipment availability, and market conditions.
  • Market Outlook: Carriers and shippers will attempt to minimize risks based on whether they anticipate a decrease or increase in freight rates over the term of the contract. Shippers will want to set a higher MQC if higher freight rates are anticipated in order to guarantee that a larger percentage of their cargo moves at the pre-agreed contract rates. In contrast, shippers will attempt to reduce their commitment (just enough to maintain sufficient inventory levels) if rates are predicted to decline, with the goal of eventually taking advantage of cheaper spot rates that will be in effect closer to the cargo readiness date.

When accepting MQCs, carriers will also assess the general business outlook and freight rate estimates, and will attempt to negotiate rates and contract term accordingly.

Container Ships, what is Container Ships, types of Container Ships
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As an example, during the peak of freight rates following the COVID-19 pandemic, carriers like Maersk implemented a novel strategy to optimise long-term profitability. They achieved this by requiring shippers to sign long-term contracts, typically lasting between two and three years. The fundamental reasoning was that, albeit being less than the current spot rates, the contractual rates that were being offered were greater than the typical contractual rates.

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This implied that even if the spot freight market eventually returned to normalcy, the carrier would still profit from higher contract rates. The fact that Maersk Line was still able to maintain revenue even in the second half of 2022 and 2023, when spot rates had begun to revert to historical average levels, is a good indicator of the strategy’s success.

  • Seasonality and Peak Season: When determining MQC volumes, it is important to include the rise in demand that occurs during peak seasons, such as Christmas or the days before Chinese New Year, as well as commodity-specific seasonality, like that of grapes or mangoes. Before committing, shippers and carriers should consider the ramifications and limitations that these sporadic demand spikes bring with them.

Bottom Line

It follows that MQCs play a significant role in the contractual arrangement between shippers and carriers. This allows shippers to ensure that space and equipment are available for the MQC volumes, while carriers are able to offer freight rates that are in line with the volumes pledged.

Commercial pressures and current market situations can occasionally cause the sacredness of the MQC volumes to be overlooked, but they are still an essential component of contractual terms and conditions.

MQCs will continue to be crucial in assisting shippers in organizing their supply chains and in assisting carriers in allocating capacity and developing business plans, given the pervasive volatility in international transport markets.

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