freight rates & structures_1
DESCRIPTION
International businessTRANSCRIPT
Freight Rates and Structures
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
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
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
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
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
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
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
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
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.
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
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.
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
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
UNCTAD
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
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
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
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
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
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
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
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
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
Thank You!!!