LINER FREIGHT RATES ( FACTORS & ELEMENTS)

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Course Code: IBO – 05
Course Title: International Marketing Logistics
Assignment Code: IBO-04/TMA/2019-20
Coverage: All Blocks

IBO – 05 International Marketing Logistics Solved Assignment for 2019-20

Q2.) Discuss the basic principles and factors that govern the liner freight rates. Also, specify the different elements added to basic freight rates to work out the final charges to be paid in case of break-bulk cargo.

Ans: The shipping services are divided into liners and tramps. Liners are ships plying on a fixed route or routes which offer cargo and/or passenger space at a fixed rate. Such ships usually carry general cargo i.e., ab accumulation of small loads belonging to various shippers. This makes liner shipping very demanding and subject to heavy losses.

The principles followed for pricing of services in liner shipping are as follows:

1.) The Cost of Services Principle: According to this principle, the lower rate is set on the total cost incurred in rendering a service. A reasonable profit margin may be added to the same and the total receipts should not be less than the total cost of service to sustain in business. 

In any case, the receipts from the carriage of cargo should not fall below the level of the total cost of operation in order to ensure the continuity of service. The liner ship operator would, therefore, make sure that the levels of freight rates charged for most of the commodities do not fall below the average cost of providing the services and, in case not below the direct costs.

2.) The Value of Service Principle: The value of service principle represents the demand side and sets an upper limit to rates on the basis of value-added by the carrier through transportation of a commodity from one country to another. In other words, the shipper's ability and willingness to pay for the service is the most relevant factor according to this principle. The rates will depend upon the difference between the price of the goods at the port of shipment and the price of the goods that can be obtained in the destination market. Thus, the value of service principles sets the maximum limit or a ceiling to the level of freight rates that could be charged. These principles, therefore, would act only as guidelines in setting lower and upper limits to rates within which appropriate rates have to be worked out for actual application.

3.) The Principle of "Charge What the Traffic Can Bear": Under this principle, the rates for different commodities are determined on the basis of the capacity of an individual commodity to bear the burden of freight. In other words, a commodity should be charged a freight rate on the basis of its ability to bear the incidence of the charge made by the liner ship operator. The commodities with a high value can be charged rates that are high enough to leave some surplus, the commodities with the medium value may be charged in such a manner that they cover the direct and fixed costs associated with their carriage; and those with the low value may be charged in a manner as to cover at least the out-of-pocket or cargo handling expenses.

Different elements added to basic freight are:

a.) Heavy lifts and long lengths surcharge: These charges are included when cargo has heavy and long items which cannot be lifted by usual ship gears and requires the use of floating derricks.

b.) Port Congestion/Standing Surcharges: This surcharge is levied when the liner carriers suffer abnormal delays at certain ports for loading and unloading operations. The time lost by the carrier at a port on account of congestion would be totally unproductive and it has to bear certain fixed items of cost, known as standing charges.

c.) Bunker Surcharges or Bunker Adjustment Factors(BAF): This surcharge has come in the wake of hike in oil-producing and exporting countries. Fuel consumption accounts for the major costs of operation for ships. Initially, due to the unexpected nature of the cost increase, most conferences levied a surcharge for compensating the carriers. But as the oil prices have been increased periodically by the OPEC, the rate of bunker surcharge has also been steadily going up.

d.) Currency Surcharge or the Currency Adjustment Factor: Due to worldwide fluctuations in currency rates and the prevalence of floating exchange rates, operators are exposed to currency risk. To overcome this, conferences have their own tariff currency and it is usually US Dollars or Pound Sterling. But liners have to deal in currencies of concerned countries at a given port of call. Thus liners in international operations are exposed to currency risk.