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Prepared by Mrs.M.Janani Department of Commerce Prepared by Mrs.M.Janani Department of Commerce (International Business) Government Arts College, Coimbatore – 18. Reference: Logistics Management and World Seaborne Trade Author: Krishnaveni Muthiah Freight rates – Principles Liner Freight structure Tramp Freight structure Freight rates should cover the costs incurred in the general operation of the transport company and those particular costs which are incurred in connection with a particular consignment, like certain special handling charges. Freight rates for any mode of transport are based on the following principles: 1. Actual Costs: Freight should cover the actual cost of transportation. The actual cost depends on the following factors: a) Fixed Cost: ◦ Freight should cover interest on capital, depreciation, registration, maintenance charges, administrative overheads, expenditure of other fixed facilities, insurance expenses and the like. ◦ Many Transport companies depending on their decision on how much to spend on each of the above stated expenditure items can bring a difference in the actual costs incurred them in comparison to the actual costs incurred by the competitor transport company. b) Semi-fixed Cost: ◦ Freight should cover the salary of the crew employed on the vessel vehicle and other miscellaneous maintenance expenses, which vary partially with the running of the vehicle. ◦ Many a times, shipping companies by employing staff who command lesser salary try to have a competitive edge over other transport corporations. c) Variable Cost: These are cost of fuel, lubricating oil and accessories which are incurred when the vehicle is on the move and the cost of repairs and maintenance directly attributable to a particular journey. For example, Tramp chartering rates will be fixed taking into account the unique variable cost to be incurred for each contract. Damage, to the vehicle and consignment enroute must also be taken into account. Sea rates for consignments passing through hazards or war-torn areas are higher d) Variable Utilisation: ◦ A transporter is interested in getting the maximum mileage out of his vehicle. He generally avoids his vehicle being held up anywhere during the journey and aims at top speed to cover the Journey in as short a time as possible ◦ Higher rates are quoted when vehicles are detained due to terminal congestion in busy ports. Freight rates also take into account the expectation of obtaining a return trip with a load. ◦ Vehicle utilisation is affected by the nature of goods. Hazardous goods attract higher freight rates. 2. Traffic Bearing Capacity: Transportation adds place utility to goods. However after addition of the cost of transport. the price of goods should be such that it is still attractive to the buyer. 3. Public Use: Consignments required for public use will be carried at lower rates than others. For example. Food grains and salt are carried at rock bottom prices, sometimes do not even cover the actual cost of operation. 4. Government Policy: Freight rates are often legislated upon, or framed on the basis of government directive which aims at serving one or the other stated objectives, such as promotion of certain types of trade, development of certain industries 5. Reasonable Profit: After covering the cost of operations and capital investment, there should be reasonable profit to compensate for entrepreneurial time and effort and for future sustenance and development of the enterprise Contracts of affreightments ◦The word "affreightment" is derived from the french word "affretement” which means the leasing of a vessel. Today the term is applied to all contracts of carriage by sea and is also extended to contracts of carriage by other modes of transport. ◦The contract may be concluded between the carrier and a shipper for the carriage of goods from one port to another port, subject to certain terms evidenced in a bill of lading, or a contract may be arranged between the ship owner and a shipper (termed as charterer) for the hire of the whole or part of a vessel for a period of time, in the terms of a charter party. In every contract there must be some consideration for its performance, and in the contract of affreightment this consideration is termed as freight. ◦Every contract of affreightment imposes on both parties to the contract specific obligations, rights, and immunities either implied by common law or expressed by statute or by the written terms of the contract itself. Sea Freight: Sea Freight is the most cost effective and a very high percentage of international transportation (in terms of tonnage) is done by this mode. Sea freight is used for transporting comparatively low value cargo where speed of delivery is not so crucial. lts main strength is that, least freight expenses are incurred when compared with air and courier services, and are more suitable for carrying bulk items. Its important weaknesses are that, it is costlier for those products which are small and tiny in nature and the time duration is long, when compared to air service. Sea Freight Rates (Tariff): Liner rates are based partly on cost and partly on value. any freight rates are quoted on a basis of weight or measurement at ships option. This means that the rate quoted will be applied either per ton of 2240 1b (weight) or on 40 ft (cubic measurement) per ton, whichever Cut off point: In most trades, cargo measuring under 40ft /ton weight is charged on weight basis and cargo measuring more than 40ft /ton is charged on a volume measurement basis. With the spread of the metric system, many freight rates are quoted per 1000 kg or m3 (35.3 ft). Liner rates are based on: a) the storage factor (rate of bulk to weight) b) on the value of the cargo and c) on the competitive situation. Many tariffs publish class rates for general cargo not otherwise specified. Commodities are grouped for charging into several classes. On commodities of very high value, ad valorem rates are charged. When commodities move in large quantities, and are susceptible to tramp competition, ship owners after employ open rates' i.e., rate is left open, so that the shipping line can quote whatever rate is determines. As far as, chartered vessels are concerned, the negotiation is usually undertaken by a ship broker who may be on the Baltic Exchange communicating with other ship broker having a vessel available on hire. The rate are not pre- determined but are based on economic forces of supply and demand. A voyage charter is a contract for a special voyage, while a time charter is for a period of time which may cover several voyages. Now the tendency on liner cargo trade is to impose a surcharge on the basic rate. This includes bunkering or fuel surcharge, currency surcharge and surcharge raised on heavy lifts necessary or on excessive height of individual consignments. 1.Advance freight: Payable in advance, before delivery of goods. Extensively used in liner cargo trade and tramping. (it must not be confused with "Advance of freight"" which is payment on account of disbursements, or an advance to the Master, in which case the charterer is entitled to return of money advanced) 2.Lump sum freight: - Payable for use of whole or portion of a ship. calculated on actual cubic capacity of the ship offered. Payable irrespective of the actual quantity delivered. 3.Dead freight: - Is a damage claim for breach of contract by the charterer to furnish a full cargo to a ship. The ship owner is entitled claim dead freight for unoccupied space. 4.Back freight - Goods have been deputed to a certain are refused port and on arrival then the freight charged for the return of the constitutes back freight. 5.Pro-rata freight - Arises when the cargo has been carried only part of the way and circumstances make it impossible to continue the voyage further (e.g. ice information at delivery port may hamper voyage and hence owner may decide to accept delivery at an intermediate port) 6.Ad valorem freight: - Arises when cargo is assessed for rate purposes on a percentage of its value. A liner conference is a group of two or more Carriers. It provides international liner services for a particular route or routes within specified geographical limits on uniform or common freight rates and on other mutually agreed conditions. A liner service provides regular sailing to scheduled ports of call. Freight rates are stable for relatively long period of time and as such enables shippers to quote CIF prices. There is coverage of a wide range of ports under liner services. In determination of liner freight rates, three basic principles are followed: 1. Cost of Service Principle: The cost of the voyage is averaged out over all the items carried by the ship. All items are charged equally, irrespective of whether they are low value or high value items. 2. Value of Service Principle: ◦ Transportation makes a product available to the consumer at the right place and at the right time. ◦ Process of transportation adds value to a product. ◦ The difference between the f.o.b. value of a product and the price in the international market is regarded by ship owners as value added as a result of the transportation system and on the basis of this difference freight charges are fixed. 3. “What the traffic can bear" principle: ◦ The liner operator classifies traffic/cargo according to f.o.b. values. The line operates along a fixed route and therefore knows the commodities or products that move out and come in. ◦ On the basis of this information, the liner operator can structure general cargo rates and specific commodity rates. ◦ These rates may be based on weight (per 1000 kg), on volume (per cubic metres) or weight/volume ratios, whichever gives the carrier a higher return.
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