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
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
 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
 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
 Liner Rates - Factors
 Basic features of the cargo:  Market condition for the
 Nature of cargo carrier:
 Volume of cargo  Competition from other
corners
 Relationship of weight to measurement or density
 Rates attractive enough
 Special features of the cargo:
to get cargo from
 Susceptibility to damage
shippers.
 Susceptibility to pilferage
 Transportation Cost
 packing
factors:
 stowage factor
 Direct cost of operation
 Heavy lifts, if any, needed
 Distance
 Extra length
 Cost of handling
 Market condition of the cargo:  Special deliveries
 Availability of cargo  Fixed charges
 Insurance
 Competition with goods from other sources
 Cargo via competitive ports  Port condition:
 Port facilities
 Port regulations
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

 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

 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
 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
 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
 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

 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
 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
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;
 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
 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!!!