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 costs

Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-39.pdf

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 density) and also varies according to the mode of shipment, such as bulk, break bulk,

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 delivery at an intermediate port

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 charges

Liner Rates - Factors

Basic features of the cargo:
Nature of cargo Volume of cargo

Market condition for the

carrier:
Competition from other

Special features of the cargo:

Susceptibility to damage Susceptibility to pilferage

corners Relationship of weight to measurement or density Rates attractive enough to

get cargo from shippers.
Transportation Cost factors:
Direct cost of operation Distance Cost of handling Special deliveries Fixed charges

packing
stowage factor Heavy lifts, if any, needed Extra length

Market condition of the cargo:

Availability of cargo Competition with goods from other sources Cargo via competitive ports

Insurance

Port condition:
Port facilities Port regulations Port charges and dues

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 service,

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 the second

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 markets and

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 the world economy

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 countries was not desirable

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 Most of the complaints are related to:

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 proposed Convention on Inter Modal Transport may push the liner Code issue to the backseat

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 nonbilateral 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;

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

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 expose unjust rejections to public scrutiny; and the need of convening a Review Conference once in five years 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!!!