Freight Rates & Structures_1

Freight Rates and Structures

Shipping Industry
Shipping - a service industry lifeline of international trade due to the morphology of our planet, 90% of

international trade takes place by sea Technological developments in ship design and construction, and the ensuing economies of scale of larger ships - promoted trade of developing nations Made economical – the transportation of goods over long distances capital intensive, cyclical, volatile,seasonal and exposed to the international business environment

Freight Rates - Definition
According to National Economic and Development

Authority

“The price paid to a ship owner for the transportation of goods or merchandise by sea from one specific port to another. The word "freight" is also used to denote goods, which are in the process of being transported from one place to another. The cost to transport supplies, materials, or equipment via a commercial carrier; also may include packing, crating, and handling

Contd….
Goods - transported (shipped) on freight-prepaid or

freight-collect basis:
(1) If freight paid by consignor (as under C&F and CIF

terms) - goods remain the consignor's property until their delivery is taken by the consignee - upon their arrival at the destination, and payment of the consignor's invoice.
(2) If freight paid by the consignee (as under FOB

terms) - goods become consignee's property - when handed over to the carrier against a bill of lading. Also called freightage, it may be charged on the weight or volume of the shipment (depending upon its nature or

Sea Tariff Rates
Freight rates quoted – either per ton of 2240 lb

(weight) or on 40 ft (cubic measurement) per ton whichever produce greater revenue
With spread of metric system - many freight rates -

quoted per 1000 kg or m3 (35.3 ft)

Types of Sea Freight Rates
Advance freight - Payable in advance, before

delivery of goods - used in liner cargo trade and tramping Lump sum freight - 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 – Goods on arrival are refused then the freight charged for the return of the goods constitutes back freight. Pro-rata freight – circumstances make it impossible to continue the voyage further - accept

Liner Rates
Liner rates are based on:
 The storage factor (rate of bulk to weight) On the value of the cargo On the competitive situation.  class rates – published for general cargo  Commodities are grouped for charging into several classes  Commodities of very high value - ad valorem rates - charged.

When commodities move in large quantities, and

are susceptible to tramp competition, ship owners employ 'open rates' i.e., rate is left open, so that the shipping line can quote their rate

Liner Rates
General cost structure:
Actual Cost: Freight should cover the actual cost of

transportation
 Fixed cost  Semi – fixed cost  Variable cost

Traffic bearing capacity Public use Government policy Reasonable profit

Freight rates are aimed to cover the variable costs

of individual consignments and a share of overhead

Liner Rates - Factors
 Basic features of the cargo:
 Nature of cargo  Volume of cargo

 Market condition for the

carrier:
 Competition from other

corners  Relationship of weight to measurement or density  Rates attractive enough  Special features of the cargo:
 Susceptibility to damage  Susceptibility to pilferage  packing  stowage factor  Heavy lifts, if any, needed  Extra length

to get cargo from shippers.

 Transportation Cost

factors:
 Direct cost of operation  Distance  Cost of handling  Special deliveries

 Market condition of the cargo:

 Fixed charges  Availability of cargo   Competition with goods from other sourcesInsurance  Cargo via competitive ports  Port condition:  Port facilities  Port regulations Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-40.pdf

LINER FREIGHT RATES
Freight rates – mostly decided by Conference –

considering – ports, commodities, distance, cargo type, et al.
CONTAINERS GENERAL CARGO CAR CARRIERS
Different Shipping Methods Port to port shipping service, door to port shipping

TANKER RATES
In the year 2008, VLCC - $96,000 per day in the first quarter

increases to $ 127,000 per day during the second quarter on Arabic Gulf/Europe route
Suezmax spot rates (West Africa/U.S.) moved up

from $54,000 per day in the first quarter of 2008 to $85,000 per day in the second quarter.
Aframax (Carib/U.S.) increased from $38,000 per

day in late the first quarter to $58,000 per day in

TRAMPING FREIGHTS
Freight rate - determined by - demand and supply

forces
CRUDE TANKERS PRODUCT TANKERS LNG/ LPG CHEMICAL CARRIERS CAR CARRIERS BULK CARRIERS

Source: “The Tramp Shipping Market”, by Clarkson Research Studies, April 2004.

Tramp Freight
Short-term fluctuations which are most relevant to

freight rates.  Different rates prevail according to whether the charter is under
Bareboat time
 reflect expectations of the state of the market during the

future period concerned

voyage condition

Because of –
openness of competition reducing the supply of tonnage operating in low

Freight Rate Indices
Selected liner rates Dry Cargo tramp rates
Time charter Voyage charters

World scale indices - tankers for five sizes of

crude and product tankers . Trend index is maintained in comparison with the rates of the base year(whose index is fixed to be 100) Baltic exchange – deals with the freight rates

UNCTAD

UNCTAD (

United Nations Conference on Trade and Development

)

Organ of the United Nations General Assembly Created in 1964 to promote international trade Principal functions –
Promotion of trade between countries in different

stages of development and with different economic systems Initiation of negotiations for trade agreements and Formulation of international trade policies. In the late 20th and early 21st centuries, UNCTAD's efforts - directed toward helping the poorest and least-developed countries to become integrated into

UNCTAD (contd…)
 Special feature - committee on shipping - deals mainly

with the commercial and international trade aspects of shipping  The research and studies included in the work programme adopted by the UNCT AD's Committee on Shipping cover the following topics:
 Establishment of National and Regional Consultation Machinery  Level and Structure of Freight Rates,Conference Practices and

Adequacy of Shipping Services  Improvement of Port Operations and Connected Facilities  Establishment of Merchant Marines in Developing countries  Technological Progress in Shipping  Reviews of Current and Long-term Aspects of Maritime Transport  International Seminars on Shipping Economics  International Legislation on Shipping

Hegemony
Establishment of the shipping industry by the

developing countries - raise the cost of shipping to the world trade - not in the interest of world economy more beneficial if employed for improvement of their infrastructure such as ports. Shipping - highly capital-intensive and sophisticated industry - developed countries had a great economic advantage over developing countries. Any interference with this state of affairs would be at the cost of the world trade and economy The developed countries had convinced themselves that on the basis of "sound economic criteria", the development of merchant marines by developing

Complaints
 Conference system – serves general cargo trade of the

world and spreads in monopolistic and oligopolistic tentacles  Preventing new shipping lines from participating in the trades and also of fixing and setting the freight rates, of adopting practices and of providing services which in many cases were not in the best interests of the trades to which they catered  Developing countries affected in two waysnot build up liner fleets for participation in their own trades Their import and export trades - suffered - as the

conferences were in a very strong position and the shippers or consignees of cargo who were unorganized could not negotiate on equal terms with the conferences


Battle
 The battle for the Code – began at UNCTAD-III in

Santiago in April-May 1972.  Developing countries - agreed upon a unified draft of a Code of Conduct for Liner Conferences and get it remitted to the UN General Assembly for further necessary processing and adoption as an international Convention or any multilateral legally binding instrument  The UN General Assembly took up the Code issue – pushed forward – to complete the task of formulating and adopting a binding global Liner Code by the end of 1973  Changed their tactics from one of a total opposition to adoption of delaying techniques to gain time on the

Final Act
 United Nations Conference of Plenipotentiaries finally

adopted a convention on code of conduct for liner conferences by an overwhelming majority. Presented herein are parts of the Final Act which deal with:  (i) Objectives & Principles  (ii) Membership  (iii) Participation by members in Conference Trade  (iv) The Implementation

Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-36.pdf

Highlights
 The right and positive role of Government in regulating

Conference shipping in accordance with the Convention;  Outside competition provided it is healthy;  The right of any country to develop its own merchant shipping fleet to carry about 40 per cent of its own foreign trade;  The right of third flag carriers to share of about 20 per cent in non-bilateral shipping routes;  A major say for shipping lines of trading partnership in Conference decisions;  Stability in liner freight rates for a period of not less than 15 months;  the need of Conferences giving not less than 150 days notice of any general rate increase;

Contd…
 The need of meaningful consultations between Conferences

and shipper interests including Government based on relevant cost data before effecting any general rate increase;  The need of fixing promotional rates for non-traditional exports  the need of loyalty arrangements identifying not only the obligationsof shippers to shipping lines as at present but also indicating the obligations of shipping lines to the trade;  Mandatory international conciliation for resolution of all disputes including those relating to freight rates. By mandatory conciliation is meant that reference to conciliation is mandatory but not acceptance of the recommendations of a conciliator;  the requirement to publish detailed reasons for rejection of the recommendations of a concilIiator, the object being to

Conference and Liability Conventions
 Membership of Developing Nations  Ocean freight conference line - an association of ocean

carriers - have consensus with regard to freight rates and shipping conditions
 Common rules of operation - hence operators in the

group charge identical rates

Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-36.pdf

Thank You!!!