Freight Rate Structure under International trade

Posted on 28 April 2023 Category : For Beginners

Freight Rate Structure

The ocean transport industry provides a wide range of shipping services, which may be broadly split into two main categories: liner shipping and tramp shipping. The determination of the freight rates is different for different forms of shipping.

Liner Shipping

Liner shipping takes place in an environment which is totally different from tramp shipping in that liner services are provided on the basis of fixed schedules and itineraries. Until recently, the liner-shipping sector was largely oligopolistic in that these services were controlled by cartels, called shipping conferences. A conference exists for each major trade route, and it is the conferences that draw up tariffs, scheduling freight rates at which goods will be transported. However, since the mid4970s many independent carriers have entered

the liner-shipping sector, and they fix their rates on the basis of 'what the traffic will bear,' essentially applying market-pricing techniques.

Two basic factors affect rate fixing in liner shipping- port and distance related factors and cargo related factors. For general cargo, liner tariff rates are assessed on either cargo weight, measurement or value. Goods measuring less than 40 cu.ft. per 1,000 kg are charged on a cargo weight basis, and above that measure by the measurement tariff scale. If goods are of very high value, they are charged irrespective of weight and measurement on an ad valorem basis. Under liner freight tariffs, carrier assumes responsibility for loading and discharging expenses, as well as the carriage of the goods by sea.

In container shipping, different charges are applied to 'less-than-container-loads' (LCL) and full-container-loads' (FCL). In the former case, the rates are usually the same as those charged for conventional shipments. For FCL containers, there exists the principle of commodity box rates (CBR). CBR is a lump sum payable for the carriage of a container stuffed with a particular commodity. The rate is based on the average utilization of the box, e.g., 13 tons in a twenty-foot container. As a more recent development, container carriers have introduced the 'freight-all-kinds' (FAK) principle. FAK rates are non-discriminatory by treating all commodities the same way. They are basically average cost rates; the ship owner distributes his projected total costs over the anticipated number of containers to be moved. In combined transport arrangements by one carrier under a through document, an inter modal freight rate is charged. This rate is the sum of charges in the port of loading, ocean freight rate, charges in the port of discharge, and the road or rail haulage to the final destination.

Conference Shipping

There are three types of conference rates, including commodity rates, class rates, and commodity-class rates. Under the first category, rates are quoted individually for several hundred commodities; under the second category tariff specific commodities are grouped into a limited number of classes. The third category represents tariffs, which are a combination of the two others.

Despite the existence of conferences and because of the increasing role of independent carriers in the liner trades, the rates actually charged vary widely and often deviate substantially from published tariffs. Carriers offer loyalty bonuses and apply rebates in violation of conference agreements.

Service Contracts: Service contracts are gaining importance whereby individual shippers pledge a minimum amount of cargo to be shipped during a certain period in return for specially discounted rates offered by the contracted carrier.

Tramp Shipping

The environment in which tramp shipping takes place is close to the model of perfect competition, and pricing is fully governed by the law of supply and demand.

The charter rates are quoted on a competitive basis through brokers in various exchanges throughout the world. The major elements which influence the fixing of a specific rate are:

(a) ship specification;

(b) trade and route;

(d) terms of charter party, i.e., distribution of costs between ship owner and charterer;

(e) duration of charter;

(f) the urgency of the charter; and

(g) the convenience of the charter to the ship owner.

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