The index that moved two days late

In the first half of October I kept a small table beside a published weekly spot index for Shanghai to Rotterdam. The index is compiled from carrier and forwarder submissions and published on Thursdays. Next to it I put the all-in price I was quoted by two forwarders on the Tuesday of the same week, for a 40-foot box, for sailing the following week.

The index moved after my quotes, every week. Not by much, but consistently.

Week	My Tuesday quote (USD/FEU)	Thursday index (USD/FEU)	Gap
29 Sep	2,310	2,285	-25
6 Oct	2,180	2,260	+80
13 Oct	2,040	2,150	+110
20 Oct	1,975	2,060	+85

My quote fell 335 dollars across the four weeks. The index fell 225. The index was above my quote in the last three weeks, and the gap was widest in the weeks when prices fell fastest.

Where the lag comes from

An index is an average of what people report, and people report what they have already booked. A forwarder who sold space on Friday at Friday’s price reports that price on Wednesday. By then the quote for next week is lower. The index therefore describes the market of about two days earlier, blended with a few quotes from the day itself.

There is a second effect. Submissions include bookings made weeks before sailing, at the price of the time. When prices are falling, older and higher bookings enter the average, and the index sits above the market. When prices are rising, the reverse happens. Neither is an error. It is what an average of past events does.

What it does to a contract review

Many index-linked contracts reset on the published number. If you review such a contract in a falling market, the reset will overstate what you could buy the same week. Over four weeks in my table, a shipper on a monthly reset paid about 85 dollars per box more than the Tuesday spot, on a lane where that shipper moves 120 boxes a month. That is just over 10,000 dollars.

If you can choose, ask for a reset on the average of the last two published values, or on a date nearer the sailing. In a rising market that works against you, so ask in the weeks when prices are falling. The sellers of the index would agree that it measures the recent past. The question is whether your contract should be priced on it.