Linear Freight Structure, Tramp Freight Structure
Irrespective of the type of shipment whether it is a break bulk or in containers, the rates charged have to reflect the law of supply and demand. The major factor in shipping industry today is the competition. Shipping conferences were introduced to stabilize freight rates, and to reduce the possibility of under-cutting of rates by an over supply of operators.
Although with the development of FAK (Freight all kinds) and ‘Box’ rates the accepted form of freight tariff has fallen into disuse in many trades, it is important to have an understanding of the structure and background of the traditional tariff which remained in common use until very recent times. A Tariff in the liner world is a published list of charges applicable to the types of cargo normally carried on the trade concerned. The charges are based either on the weight carried, for heavy (dense) cargo, or on the volume taken up, for light cargo. The cubic meter is now the standard unit having replaced 40 cubic foot, which was the common measure. If the cargo occupies less than 1 cu.m. per ton weight, the charge will be based on weight, or deadweight. If more than 1 cu.m then the charge is based on the volume used.
The Liner Conferences set the amounts that members would charge shippers for carrying their cargo from port to port or door to door in the case of containers. Generally, other than normal market forces, there is little outside interference, however some Governments require consultation and approval before permitting any rate increases while the USA continues to require rates to be filed with the FMC. In Europe the competition authority disputes the right of conferences to fix rates for inland movement.
Essentially the laws of supply and demand fix the rates. The criteria for this was based partly on the principle of “charge what the trade can bear” that is the rates are pushed upwards until shippers begin to look for cheaper rates elsewhere. The lower end of the rate spectrum is, of course, governed by the need to ensure an operating surplus.
In reality, whereas all conferences were able to set their own rates, they were all constrained by the rates being set by non-conference operators.
Freight charge is the consideration paid by the shippers or consignees to carrier for moving their cargo (transportation from one location to another location) for using vessel space of liners. The allocation of space to accommodate the cargo and to transport it from the port of loading till the discharge port has got different type of expenses to the liner and the income out of such transporting should be more than the cost of such movement. The freight rates are set after taking into consideration of various factors as detailed below:
FACTORS CONSIDERED WHILE FIXING FREIGHT RATE
- The weight and the measurement of the commodity being shipped
- The value of the commodity
- The distance.
- Efficiency of the port of origin and port of destination.
- Maintenance cost of the containers
- Port charges including tug hire, pilotage, port dues, lighterage etc.
- Cargo handling expenses (cranage etc)
- Various taxes
- Freight forwarding, cargo brokers commission.
- Nature of the cargo
- Fuel / bunker costs & fuel efficiency of the ship.
- Canal dues.
- Cargo availability at the ports of call.
- Charter market demand & supply of ships.
- Equipment repositioning cost.
- Vessel frequencies and speed of the vessel and transit time.
- Value added service.
- Other ports located in the same region.
Two most important parameters of cargo are weight and measurement. Break bulk or LCL cargo freight rates are quoted in revenue ton basis i.e. weight ton or measurement ton whichever is higher. FCL rates are quoted based on the size and type of the container.
In the case of ad-valorem B/L the value of the cargo will be mentioned in the B/L. In such case the carrier Limitations of liability will be the stated value. Because of increased liability the carrier recovers higher freight (advalorem basis eg 5% of the declared value on high value cargo such as gold and silver)
Many shippers do not mention value of the cargo in the B/L to avoid higher freight. Even carriers do not prefer such declaration, as they have no means of checking. Not only the question of checking the value of the cargo, but also the risk of their liability in case of loss / damage to the cargo.
TRAMP FREIGHT STRUCTURE
Tramps are not follow the schedule when to move the product. It only requires when the customer wants to used their service. Their service price are not fixed. It also depends on the carrier to set up the price of the service. Usually tramps carry the product in seasonal demand and also bulk cargo. For example grain, coal, sugar. Tramps can give their service to customer at any time that customer want.
Tramps also handle the urgent product to deliver or emergency product. So, in this case, tramps can take advantage from the shipper. Carrier can take the higher cost of service to the shipper. This is because they should deliver the product in fast and also the price is not to negotiate. So, the shipper will accept, when the carrier set the price of the service is high. This is because they only think that the product should be arrived at the customer on time.
The tramp ship is a contract carrier. Unlike a liner, often called a common carrier, which has a fixed schedule and a published tariff, the ideal tramp can carry anything to anywhere, and freight rates are influenced by supply and demand. To generate business, a contract to lease the vessel known as a charter party is drawn up between the ship owner and the charterer. There are three types of charters, voyage, time and demise.
- Voyage charter
Voyage charter: The voyage charter is the most common charter in tramp shipping. The owner of the tramp is obligated to provide a seaworthy ship while the charterer is obligated to provide a full load of cargo. This type of charter is the most lucrative, but can be the riskiest due to lack of new charterers. During a voyage charter a part or all of a vessel is leased to the charterer for a voyage to a port or a set of different ports. There are two types of voyage charter – net form and gross form. Under the net form, the cargo a tramp ship carries is loaded, discharged, and trimmed at the charterer’s expense. Under the gross form the expense of cargo loading, discharging and trimming is on the owner. The charterer is only responsible to provide the cargo at a specified port and to accept it at the destination port. Time becomes an issue in the voyage charter if the tramp ship is late in her schedule or loading or discharging are delayed. If a tramp ship is delayed the charterer pays demurrage, which is a penalty, to the ship owner. The number of days a tramp ship is chartered for is called lay days.
- Time charter
Time charter: In a time charter the owner provides a vessel that is fully manned and equipped. The owner provides the crew, but the crew takes orders from the charterer. The owner is also responsible for insuring the vessel, repairs the vessel may need, engine parts and food for the ship’s personnel. The charterer is responsible for everything else. The main advantage of the time charter is that it diverts the costs of running a ship to the charterer.
- Demise charter
Demise charter: The demise charter is the least used in the tramp trade because it heavily favors the owner. The ship owner only provides a ship devoid of any crew, stores, or fuel. It is the Charterer’s responsibility to provide everything the ship will need. The ship owner must provide a seaworthy vessel, but once the charterer accepts the vessel, the responsibility of seaworthiness is the charterer’s. The charterer crews the vessel, but the owner can make recommendations. There are no standardized forms in a demise charter, contracts can vary greatly, and are written up to meet the needs of the charterer.
Tramp ship owners and tramp ship charterers rely on brokers to find cargoes for their ships to carry. A broker understands international trade conditions, the movements of goods, market prices and the availability of the owner’s ships.
The Baltic Exchange, in London, is the physical headquarters for tramp ship brokerage. The Baltic Exchange works like an organised market and provides a meeting place for ship owners, brokers and charterers. It also provides easy access to information on market fluctuations and commodity prices to all the parties involved. Brokers can use it to quickly match a cargo to a ship or ship to a cargo depending on whom they are working for. A committee of owners, brokers and charterers are elected to manage the exchange to ensure everyone’s interests are represented. With the speed of today’s communications the floor of the Baltic Exchange is not nearly as populated as it once was, but the information and networking the exchange provides is still an asset to the tramp trade.