freight rates & structures_1

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Freight Rates and Structures

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Page 1: Freight Rates & Structures_1

Freight Rates and Structures

Page 2: Freight Rates & Structures_1

Shipping IndustryShipping - a service industry lifeline of international tradedue to the morphology of our planet, 90% of

international trade takes place by seaTechnological 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

Source: http://www.maritimeeconomics.com/downloads/papers/HH_Liner%20Shipping%20Economics.pdf

http://web.ebscohost.com/ehost/pdf?vid=6&hid=106&sid=dc433ce8-2cec-46a6-8708-2be18bfc234e@sessionmgr109

Page 3: Freight Rates & Structures_1

Freight Rates - DefinitionAccording 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

Page 4: Freight Rates & Structures_1

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, containerized

Page 5: Freight Rates & Structures_1

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)

Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-40.pdf

Page 6: Freight Rates & Structures_1

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

Ad valorem freight: - Arises when cargo is assessed for rate purposes on a percentage of its value

Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-40.pdf

Page 7: Freight Rates & Structures_1

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 cargoCommodities are grouped for charging into several classesCommodities 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

Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-40.pdf

Page 8: Freight Rates & Structures_1

Liner RatesGeneral cost structure:

Actual Cost: Freight should cover the actual cost of transportation Fixed costSemi – fixed costVariable cost

Traffic bearing capacityPublic useGovernment policyReasonable profit

Freight rates are aimed to cover the variable costs of individual consignments and a share of overhead

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

Page 9: Freight Rates & Structures_1

Liner Rates - Factors Basic features of the cargo:

Nature of cargo Volume of cargo Relationship of weight to measurement or density

Special features of the cargo: Susceptibility to damage Susceptibility to pilferage 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

Source: http://www.rocw.raifoundation.org/management/mba/Int_Logisticsmanagement/lecture-notes/lecture-40.pdf

Market condition for the carrier: Competition from other corners Rates attractive enough to get

cargo from shippers. Transportation Cost factors:

Direct cost of operation Distance Cost of handling Special deliveries Fixed charges Insurance

Port condition: Port facilities Port regulations Port charges and dues Port locations Possibility of securing return

cargo

Page 10: Freight Rates & Structures_1

LINER FREIGHT RATESFreight 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, and door to door shipping service.

Page 11: Freight Rates & Structures_1

TANKER RATESIn 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 quarter

Source:http://www.marsoft.com/high_tanker.htm

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Page 13: Freight Rates & Structures_1

TRAMPING FREIGHTSFreight rate - determined by - demand and supply

forces

CRUDE TANKERSPRODUCT TANKERSLNG/ LPGCHEMICAL CARRIERSCAR CARRIERSBULK CARRIERS

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

Page 14: Freight Rates & Structures_1

Tramp FreightShort-term fluctuations which are most relevant to freight

rates. Different rates prevail according to whether the charter is

underBareboattime

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 increasing the supply at short notice in boomstramp shipping has suffered severe cyclical fluctuations Source:http://www.marsoft.com/high_tanker.htm

Page 15: Freight Rates & Structures_1

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

Source:http://www.marsoft.com/high_tanker.htm

Page 16: Freight Rates & Structures_1

UNCTAD

Page 17: Freight Rates & Structures_1

UNCTAD (United Nations Conference on Trade and

Development)Organ of the United Nations General AssemblyCreated in 1964 to promote international tradePrincipal functions –

Promotion of trade between countries in different stages of development and with different economic systems

Initiation of negotiations for trade agreements andFormulation 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

Source: http://www.encyclopedia.com/doc/1B1-381546.html

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

Page 18: Freight Rates & Structures_1

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

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

Page 19: Freight Rates & Structures_1

HegemonyEstablishment 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

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

Page 20: Freight Rates & Structures_1

ComplaintsConference 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 tradesTheir 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:

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

Page 21: Freight Rates & Structures_1

BattleThe 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

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

Page 22: Freight Rates & Structures_1

Final ActUnited 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

Page 23: Freight Rates & Structures_1

HighlightsThe 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;

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

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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 review the working of the Convention

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

Page 25: Freight Rates & Structures_1

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

http://r0.unctad.org/ttl/docs-legal/unc-cml/status/Convention%20on%20a%20Code%20of%20Conduct.pdf

Page 26: Freight Rates & Structures_1

Thank You!!!