Ocean Freight Rates

Freight Rate Principles

In transportation of goods through sea routes, among other factors ocean freight is most critical. The levy of ocean freight however depends on a number of factors which are as follows.

Destination: The destination is a crucial factor for determining ocean freight rates. In simple terms, the longer the journey, the higher is the ocean shipping rate and vice-versa.
Service Charges: The additional charges levied by port authorities like the security service charges affect the ocean freight rate.
Season: For certain goods, the season becomes a very important factor. Grains and fruits transported during a particular freight season will have higher cargo rate.
Currency: Presently the common denomination used for international transaction purposes is the US dollar. Fluctuations in the rate of exchanges will influence the freight rate.
Fines and Fees: In case of delay in ship reaching the port because of over-crowding, there may be a fine imposed which affects the ocean shipping rates.
Terminal Fees: The ocean freight also depends on the fees to be paid while embarking the journey from a port and after reaching the intended destination. These fees known as terminal fees also affect ocean freight rate.
Bunker Capacity: Bunkers are containers to store the fuel. Increases in fuel prices and the recent prevailing fuel rates will affect the freight charges.
Container Capacity: In case the shipper does not have enough goods to fill the containers to their optimum capacity, it will affect the freight charges by way of the shipper having to pay more in spite of lesser quantity.

Ocean shipping rates are normally pre-set and are standardized. But frequent shippers can make use of client-business relationship to avail of discounts and waivers. In a similar manner, shippers who use chartered vessels to transport their goods have to pay an amount which is settled on the day the transporting agreement is made between both parties.

Types of Freight Rates

The types of fright rates observed in regular business transactions are.

Advance freight: This is payable in advance, before delivery of goods – used in liner cargo trade and tramping.
Lump sum freight: This is payable for use of whole or portion of a ship.
Dead freight: Damage claim for breach of contract by the charterer to furnish a full cargo to a ship
Back freight: If the goods on arrival are refused then the freight charged for the return of the goods constitutes back freight.
Pro-rata freight: If circumstances make it impossible to continue the voyage further and the shipper accepts delivery at intermediate port, pro-rata freight is charged.

Sea freight calculations can broadly be divided into two main components; break bulk and containerized.

Break bulk cargo: Break bulk cargo, is cargo that is unitised, palletised or strapped. This cargo is measured along the greatest length, width and height of the entire shipment. The cargo is also weighed. Shipping lines quote break bulk cargo per weight/measure, which is either per metric ton or per cubic meter, which ever yields the greatest revenue.
All shipping lines carrying cargo in a break-bulk form insist on payment based on a minimum freight charge which is equivalent to one freight ton, one cubic meter or one metric ton.
Containerized: Freight rates for containers are based on the container as a unit of freight irrespective of the commodity or commodities loaded therein, (FAK) Freight All Kinds. The shipping lines quote per box (container) either a six or twelve meter container

Freight Surcharges and Rebates

The following surcharges and rebates are generally applicable in ocean freight charges.

Bunker Adjustment Factor (BAF): “Bunkers” is the generic name given to fuels and lubricants that provide energy to power ships. The cost of bunker oil keeps fluctuating continuously without any prior indication.
Currency Adjustment Factor (CAF): The currency adjustment factor is a mechanism for taking into account fluctuations in exchange rates, these fluctuations occur when expenses are paid in one currency and monies earned in another by a shipping company.
The currency adjustment factor is a mechanism for taking into account these exchange rate fluctuations. It is always expressed as a percentage of the basic freight and is subject to regular review.
Peak season surcharge (PSS): PSS is a surcharge that is applied to both airfreight and sea-freight originating in the Far East. Due to the rapid growth in exports from countries such as China, and the lag in the provision of commensurate infrastructure to handle this unprecedented growth, backlogs occur at certain times of the year. A shortage of transport carrier capacity and an imbalance in trade flows means that carriers can apply this surcharge which customers are forced to pay. The surcharge may be a considerable uplift on the normal freight rates.
Repositioning charge: This is a surcharge that is sometimes applied by the shipping line to cover the cost of returning an empty container to a location where it may be loaded with revenue-earning cargo. The cost of handling, shipping and trucking the empty container is a loss to the shipping line.
War Surcharge: The outbreak of war or hostilities between countries can have significant effect upon carriers servicing international trade even though they may sail under a neutral flag. Carriers sailing within the vicinity of a war zone may impose a war surcharge on freight to compensate for the higher risks involved and the higher levels of insurance premium, which they may have to pay.

Example

Freight rate: Mumbai to Singapore

Freight rate: US Dollar: 4000.00 per 20-M container+ WAR 6%

US Dollar 4000.00 X 5% = US Dollar 200.00

Adding the two amounts together Freight rate: US Dollar 4200.00

All of the above surcharges may be applied to a single freight rate.

Example

Freight rate: Mumbai to Singapore

Freight rate: US Dollar: 4000.00 per 20-M container+ BAF 5%+ CAF 6%+ WAR 6%

Total amount of surcharge 16.0%

US Dollar 4000.00 X 16% = US Dollar 640.00

Adding the two amounts together Freight rate: US Dollar 4640.00

Port Congestion Surcharge: Congestion in a port for a period of time can involve considerable idle time for vessels serving that port resulting in loss to the ship owner. Shipping lines therefore have the right to impose a surcharge on the freight to recover revenue lost. Another factor which influences port congestion surcharge would be labour disputes. Port congestion surcharges are calculated as a percentage of the freight rate as expressed in the previous examples.

Liner Freight Rebate System

Liner Freight Rebate Systems or Loyalty arrangements are the means that have been devised to secure the continued and exclusive patronage of shipper to the conference lines. The purpose is to eliminate competition.

The rebate systems in operation are,

Deferred rebate: The rebate is calculated on the freight cost during a designated period called the shipment period of usually 3 to 6 months, but is paid after the same period of time (deferred period) following the shipment period on the condition that the shipper will continue to use the conference lines for all his shipments during the shipment period and deferred period.
Dual rate system: If the shippers sign a contract with conference for exclusive patronage, they get the benefit of rates which are lower than the rates applicable to non-contract shippers.
Immediate rebate system: Under this system the contract shippers are given immediate rebate (usually 9.5%) on the freight on shipments of their cargoes. So shippers get their money rebate without any deferment.

Baltic Freight Index

The Baltic Exchange plays an important role in the global maritime sector and provides daily independent shipping market information. The Baltic Exchange produces more than 50 daily assessments of the freight values for various shipping routes and sizes (dry, wet and LPG) as well as weekly sale and purchase and demolition value assessments.

The Baltic Freight Index (BFI) was introduced in 1985 to provide the settlement for a new freight futures contract, BIFFEX. In the late 1990s the BFI was sub-divided into vessel-specific indices to allow better hedging strategies for the market and the changes in the original index can be listed as under,

1998: The Baltic Exchange Dirty Tanker Index (BDTI) and Clean Tanker Index (BCTI) were introduced.
1999: The Baltic Cape Index (BCI) and the Baltic Panamax Index (BPI) became active.
2001: The Baltic Handy Index (BHI) which was introduced in November 1997, became the Baltic Handymax Index (BHMI) in 2001.
2006: The Baltic Supramax Index (BSI) superseded the BHMI as part of the general evolution of ship types.
2007: The Baltic Handy size Index was introduced to represent the smaller dry bulk vessels trading in the market.
2003: The Baltic Liquidified Petroleum Gas Assessment (BLPG) was introduced.
2004: The Baltic Sale and Purchase Assessment (BSPA) and the Baltic Demolition Assessment (BDA) were introduced.

The Baltic Exchange provides the settlement prices for all dry and the majority of wet FFAs and is responsible for collating the route and index figures, which are published on all UK working days at 1300 (for dry) and 1600 (for wet and LPG). The BSPA and the BDA are published weekly on a Tuesday.

The Baltic also publishes the daily dry and wet forward curves received from the FFA brokers which are used by the clearers for margining purposes. The Baltic Handymax Index (BHMI) is calculated from the weighted, average rates on major time charter routes, with two trial voyage routes, as assessed by a panel of brokers. The Baltic Panamax Index (BPI) is calculated from the weighted, average rates on major routes, both voyage and time charter, as assessed by a panel of brokers.

The Baltic Capesize Index (BCI) is calculated from the weighted, average rates on major routes, both voyage and time charter, as assessed by a panel of brokers.

The Baltic Dry Index (BDI) is the average of the Baltic Handymax Index (BHMI), the Baltic Panamax Index (BPI) and the Baltic Capesize Index (BCI). The BDI provides a good general indicator of movement in the dry bulk market, and continues the established time series of the Baltic Freight Index (BFI) which was introduced in 1985. As the index is derived from polling the market and not traded, there is no speculative factor influencing the movement of the index. This index is a concurrent indicator of the growth or decline in global cargo trades

Contract of Affreightment

Contract of Affreightment in international commercial navigation is a contract by which maritime cargoes are transported.

The contract of affreightment may take the form of,

A charter party, where an entire ship is hired, or
A bill of lading, where the goods to be carried in a general ship which can be used for this purpose by any person.

Charter party: It is a contract between a ship owner and someone who wishes to hire or let their ship, for a period of time or for a particular voyage.

Types of Charter party

Time Charter party. : In this case the ship is hired for a set period of time. The owner remains in charge of it but the charterer can take it anywhere and transport anything. The charterer has to pay a fee plus the fuel used and port charges levied.
Demise / Bareboat Charter party: This is a sub-type of Time Chartering, where a ship is hired for a number of years and the charterer provides crew, insurance, maintenance themselves. Often the charterer obtains ownership after a set period of payments, and the Charter party therefore acts as a form of finance for the sale of the ship.
Voyage Charter party: This is where a cargo interest just charters a ship for one particular job for moving a bulk consignment. No crew costs, fuel costs or port charges are passed on by the owner, there is usually only one catch-all fee (but the charterer pays the stevedores).

Bills of Lading: Bill of lading is a document issued by a carrier, to a shipper, acknowledging that goods have been shipped on board for conveyance to a specified party and place.

A Bill of Lading has three main purposes.

It acts as a receipt for the goods, showing the carrier took possession of them,
It is evidence of a contract of carriage,
It is a document of transfer, being freely transferable

Freight Brokers and Freight Forwarders

Freight Forwarder: A Freight Forwarder essentially secures the business of various exporters and importers and has the ability/facility for,

storage of the cargo belonging to the clients at their warehouse,
arranging the distribution or “forwarding” of the cargo as per the instructions of their client,
negotiating the freight rates with the shipping line to cover the interest of their clients,
booking the cargo with the shipping line as per the requirement of the client,
preparing bills of lading and associated shipping/negotiating documentation
issuing their approved house bill of lading as applicable

If the Freight Forwarder is accredited to customs, port etc they may also arrange for customs clearance.

Broker: A Broker is someone who arranges transportation with a carrier, either on behalf of the shipper or behalf of the carrier with the following conditions.

Brokers generally cannot issue their own bills of lading with their name in the carrier field.
They forward any freight claims to the carrier for handling/compensation and generally cannot be held liable for any claims.
Do not arrange or provide any insurance cover for the customers’ cargo.
A broker’s client base can consist of direct exporters, importers, freight forwarders, clearing agents.

Freight Rate Calculation

Conference Discounts & Contract Shippers

When a general cargo contract is signed between a shipper and the conference, the contract shipper is prohibited from participating directly or indirectly in any arrangements relating to the carriage of cargo by any vessel not operated by one of the conference carriers.

The freight conference offers discounts or rebates to the contract shipper, also known as ‘loyal’ shipper, who gives its entire support to members of the conference. The contract shipper usually enjoys an immediate discount (about 9.5%) on the freight rate ruling at the time of shipment. Some contracts may grant a rebate (about 10%) after a certain period (usually 6 months or more) of loyalty to the conference instead of immediate discount on each consignment.

Measures of Freight Cost Calculation

The freight rate on export goods is often based on W/M (weight or measure), that is, based on the weight or the volume of cargo (the cube or measurement of cargo). A cargo that is large in relation to its weight is charged according to its total cube, while a cargo that is heavy in relation to its size is charged according to its gross weight.

The freight cost by weight or measure that will give the carrier the higher revenue is the rate that applies. In general, light cargo is charged based on measure, while heavy cargo based on weight. The unit of ton being used in the freight cost calculation may differ among carriers. It can be a metric ton (2204.6 lbs. or 1000 kgs.), a short ton (2000 lbs. or 907 kgs.), or a long ton (2240 lbs. or 1016 kgs.). The exporter must verify with the carrier which unit is being used. In practice, the most frequently used is the metric ton.

Units of Weight or Measure Commonly used in the Freight Cost Calculation,

MT = metric ton

Kg. = kilogram

lb = pound

CBM = cubic meter

cms. = cubic centimeters
ft. = cubic feet
ins. = cubic inches

Example of freight calculation

A case has a gross mass of 2 MT.

The dimensions of the cargo are: 2.5 X 1 X 2 metres

The tariff rate quoted by the shipping line is: USD 110.00 weight or measure (freight ton)

Step 1: Determine the volume: 2.5 X 1 X 2 = 5 cubic meters Compare to the mass = 2 MT.
Step 2: Calculate the freight with the greater amount either the mass or the volume:

5 X USD 110.00 = USD 550.00

Freight would be paid on the volume and not the weight as the former is higher. All shipping lines carrying cargo in a break-bulk form insist on payment based on a minimum freight charge which is equivalent to one freight ton, one cubic meter or one metric ton.

The unit of ton being used in the freight cost calculation may differ among carriers. It can be a metric ton (2204.6 lbs. or 1000 kgs.), a short ton (2000 lbs. or 907 kgs.), or a long ton (2240 lbs. or 1016 kgs.). The exporter must verify with the carrier which unit is being used. In practice, the most frequently used is the metric ton.

Some freight carriers may use the (long ton) 2240 lbs. (as weight) or 40 cu. ft. (as measure) in the freight cost calculation. Some freight carriers may use the terms U.S. shipping ton and British shipping ton. 1 U.S. shipping ton is equivalent to 40 cubic feet, and one 1 British shipping ton is equivalent to 42 cubic feet. Other units may be used in the inland freight cost calculation. For example, the inland freight could be charged on a per package basis, but within a maximum allowable weight and/or cube per package. Some carriers may rate a product on a weight basis only.

In the case of irregular shaped cargo, the weight or measure applies, where the measure is determined by taking the three widest dimensions that describe the smallest cubic space enclosing the cargo.

Freight Adjustments (CAF and RAF)

From time to time, abnormal or exceptional costs arise in respect of which no provision has been made in the tariffs. For example a shipping line cannot predict the movement of the US Dollar or the sudden increase of the international oil price. These increases have to be taken into account by the shipping line in order to ensure that the shipping line continues to operate at a profit. These increases are called surcharges. BAF and CAF are floating charges, which increase or decrease the base freight amount. BAF (Bunker Adjustment factor) charge reflects the direction of changes in oil prices.

Example

Freight rate: Mumbai to Singapore

Freight rate: US Dollar: 4000.00 per 20-M container+ BAF 5%

US Dollar 4000.00 X 5% = US Dollar 200.00

Adding the two amounts together Freight rate: US Dollar 4200.00

CAF (Currency Adjustment Factor) charge represents the influence of the changes in the currency rate to the freight. Usually BAF is a fixed amount, while CAF is usually specified as a percentage of the base freight amount.

Example

Freight rate: Mumbai to Singapore

Freight rate: US Dollar: 4000.00 per 20-M container+ CAF 6%

US Dollar 4000.00 X 6% = US Dollar 240.00

Adding the two amounts together Freight rate: US Dollar 4240.0

BAF and CAF are applied by sea lines, which unite together to form the so-called regional conferences. Different BAF and CAF rates are applied when transporting form different countries.