LECTURE 10 TITLE: Price/Freight rate/Tariff Setting in Liner Shipping

1.0 INTRODUCTION. 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 Liner conferences operate based fixed sailing schedules,.. ..fixed freight rate,.. ..commonly applied throughout,.. ..thus indicating that supply of services is not a direct determinant in price setting. Liner conference is said to be cartel,.. ..that act ologopolistically,.. ..thus appearing like monopolist,.. ..or even those that adopt price discrimination. An understanding on how liner conference do their pricing will give better insight into the economic of liner shipping.

2.0 CHARACTERISTIC OF FREIGHT RATE IN LINER MARKET 2.1 2.2 2.3 2.4 2.5 2.6 Of course, as have said previously, liner rates are common,.. .and fixed in tariff books,. .and modifiable by shipowners under the differed rebate and dual rate contract. Other general information on liner rates are;.. ..there exist what we call commodity box rate (CBR) for containerised cargo,. ..there exist what we call freight all kind (FAK) for containerised cargo,..

2.7 2.8 2.9 2.10 2.11 2.12 2.13

2.14 2.15 2.16 2.17 2.18 2.19

..that rates are also frequently adjusted such as to cover currency risk. It is also characterised by the fact that: ..conferences have market power,.. ..and supply and demand are not the only determinants of freight rate setting in liner shipping,. ..freight rate applies to cargo moving under loyalty contract ( as under 2.3),.. ..that tariff condition will provide for additional charges applicable to non-contract cargo,.. ..that there are few non-conference liner operater around the world (thus limited number of shippliers),.. ..that they administer freight rate rather than be determined by the force of demand and supply,.. ..that freight rate rate does not change daily or even hourly, as in charter market,.. There are three issues under price setting in liner market:,.. ..the structure of the price,.. ..the general level of price,.. ..the influence of containers and multimodal transport.

3.0 TARIFF STRUCTURE 3.1 Liner deals with many different types of cargo,.. 3.2 ..by value and nature/characteristic. 3.3 Thus apart from being influenced by distance,. 3.4 ..rate is also influenced by cargo characteristic. 3.5 Distance-tariff has 4 basic rate structure;. 3.6 ..first the postage stamp structure where rate does not change at all with distance,.. 3.7 ..second the modified mileage structure that takes into account terminal and cargo handling cost,..

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3.9 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 3.21 3.22 3.23 3.24

..third the blanket structure applied to a certain commodity from a given origin to all points within a certain geographical region (known as group rate or zone rate),.. ..fourth the straight mileage structure where rate is directly proportional to distance. Cargo characteristic-tariff base:.. ..weight of cargo,.. ..measurement of cargo,.. ..value of cargo,.. ..open market rates. Final rate is the selection of the shipowner to ensure profit. This is set against free on board (FOB) value of cargo,.. ..where basically high value cargo will be charged more,.. ..according to what the market will bear,. ..which is known as cross-subsidisation,.. ..also known as ad-valorem price setting where price is influenced by value of cargo.. Rates for general cargo is not specified in tariff,.. ..and this are commodities normally moves in large quantities,.. ..or commodities susceptible to charter competition,.. in which case liner company will charge as they like.

4.0 RATE ADJUSTMENT 4.1 Liner rates, as compared to those on tariff book, when charged to shippers will sometimes be adjusted under four situations, 4.2 ..first under the loyalty contract arrangement,..

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4.9 4.10 4.11 5.0

..second to take into account currency adjustment factor,.. ..third to take into account bunker adjustment factor,.. ..fourth to include shipowners surcharges. The first is as made clear before,.. ..the second is in term of factor, say 1.3, against the conference preferred currency, normally US dollars,.. ..where the formula to determine the factor is monitored by international bodies such as Council of European and Japanese Shipowners Association (CENSA),.. ..the third by percentage of freight rate,.. ..or even base on freight tone or cubic meter,.. ..the fourth as real added amount.

COMMODITY BOX RATE (CBR) AND FREIGHT ALL KIND (FAK). 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 No matter what the name is the principle is based on five container freight components:.. ..first the inland haulage at point of origin,.. ..second the terminal charges and handling at port of origin,.. ..third the ocean freight cost,.. ..fourth the terminal charges and handling at port of destination,.. ..fifth the inland haulage at point of destination. CBR is a lumpsum rate per container, say for the 20ft,.. ..base on the fact that average 20ft will be stuffed with 13tons of goods,.. ..and weight and measurement of goods is not checked.

5.10 FAK is based on shipowners average cost of providing the service,. 5.11 ..applicable for a certain voyage,.. 5.12 that deals with the carriage of certain anticipated number of containers through certain number of ports,. 5.13 ..that will be applied equally to any type of cargo within that particular situation. 6.0 CLOSING 6.1 It is confirmed that price of liner services is administered. 6.2 It is administered towards their advantage. 6.3 This thus allows us to point them towards being monopolistic as well as price discriminator when they act oligopolistically as a cartel.