Chapter 8

TARI FFS AND PRICING

8.1 TARIFFS AND FREIGHT RATES
8.1.1 troduction - The Basic Economics of World Trade
Trade is a word meaning the exchange or 'barter' of two commodities, where each one is
owned by a separate party. One of the two will be a product that has been produced in some
way, e.g. manufactured or grown, and the other is generally some form of currency.

Before the advent of money as we know it today, goods were exchanged , a cow for grain, a
pig for cloth, and this was how the word barter came into being.

Today the 'value' (which is not the same as 'price') of a commodity depends on the need for
the item. People are prepared to pay more for something which they need urgently , this item
therefore has 'value' for them. Manufacturers recognise this and will charge a higher price,
the amount of worth in currency terms.

The movement of goods around the world, therefore , depends on the demand for them by
customers or importers,who will range from governments to very small businesses. Countries
need to export to earn foreign currency with which to buy necessary imports.

There is, however, another component in the scene, and this is the factor of 'competition' .
There are some goods, the vast majority of which are produced by one country only, such as
South African diamonds , and others, such as grain, which are produced in many countries
but exported only by a few, commanding a price decided by the producer .

Most products have to compete with the same or similar goods from other sources, either in
the same country or from other countries. Competition is the method by which prices are held
down and manufacturers are forced to be more efficient.

1.2
Shipping is simply another product, referred to as a 'service' as what is bought is not a ship,
but 'space'. Service industries are those that meet a need, such as accommodation , legal,
medical, travel, food and leisure pursuits. They meet what is known as 'Derived demand'·
the demand for shipping is derived from the need to transport the goods.

However, as with virtually every form of trade, Shipowners are in competition with each other
for the goods, the cargoes , which move from country-to-country .

Shipowners are bound by the economic laws of supply and demand. If too much is supplied ,
the customer has to be tempted to buy the surplus by a reduction of the price, if there is a
shortage the price goes up to reduce demand.

Too many ships chasing too few goods means that prices, freight rates, will fall as Owners
undercut each other to attract the client.

.3 '7he Freight Rates

While it is implicit, it should be stated what the 'freight rate' is intended to cover.

In the case of conventional cargo this is the sea transport from 'ship's rail to ship's rail'. In
respect of container cargo it effectively excludes both the loading onto and discharge from
the ship, which are covered by the Terminal Handling Charge (THC).

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LINEA TRADES

Whether goods are shipped break-bulk or in containers the rates charged have to reflect
the laws of supply and demand . The major factor impinging on shipping today is that of
compet ition. Shipping Conferences were introduced to stabilise freight rates, and to reduce
the possibility of a ruinous 'under-cutting' of rates by an over-supply of Operators .

Rates are set after taking in various factors :

Freight Volume
The volume of freight moving between ports must be considered. A large amount of cargo
will allow a regular operation , making maximum use of ships and port facilities. Ships, to earn
revenue, must be moving, preferably with a full cargo.

The Amount and Nature of the Competition

The knowledge that there is a large cargo volume will attract Owners anxious to obtain a
share of the trade and the level of freight rates will be reflected accordingly .

omy of Scale
This comes into effect with large, regular operations. The Owners can afford to employ
specialist staff and do not have to hire the services of agencies .

erat ing Costs

These obviously are the major consideration . Profit is the result of deducting costs from
income.

The revenue, therefore , regardless of all other considerations has to cover:

(a) Depreciation costs of vessels and equipment.

(b) Crew wages and other elements .

(c) Bunker, water and stores costs.

(d) Repair and maintenance costs.

(e) Port dues and charges, pilotage, tugs and agency costs.

(f) Insurance, P&I Club costs.

(g) Container and other equipment supply and repair costs.

(h) Head and branch office staff and administration .

(i) Marketing costs.

If the revenue earned does not meet these, the Owner cannot survive.

charges
In addition to those above, there are other factors that have to be taken into account , and the
Tariffs have to include a Surcharge, or additional c s to cover additional expenses to which
the Carrier will be liable. These are:

(a) Currency fluctuations , when the currency of a country involved in the service has a
'floating' currency which causes the rate against the Carriers currency to vary. This
could be at ports of call 'en route'. as well as at the discharge port. The amount
charged is a percentage of the tariff rate, and is referred to as a Currency Adjustment
Factor, (CAF)
 TAR•FFS AND PRICING

(b) Bunker surcharges, which are caused by fluctuations in the price of oil are charged
similarly . They are called the Bunker Adjustment Factor (BAF).

(c) Variations in any canal dues will eventually affect the rates.

(d) War risks cause heavy rises to insurance premiums.

(e) Port congestion, strikes and delays cause the Shipowner additional daily
costs.

(f) Rates are increased for livestock, dangerous , valuable , heavy or extra long goods
to accommodate the extra expense of handling these commodities .

These items, being variable, are usually included in an addendum detailing the extra costs
that these items may incur and the Carrier would pass them on to the Shipper. The cost of
the goods in the shops, or the products made by the goods will be increased to reflect the
extra cost of sea carriage .

:.1.4
With the development of FAK (Freit All Kinds) and .:_Lump su!!Lor Box' rates the traditional
form of freight tariff has fallen into disuse in many trades . However, it is important to have
an understand ing of the structure and background of the traditional tariff which remains in
use in some important trades and certainly still influences the thinking behind other tariff
applications .

A Conference Liner Tariff is a published list of char es a licable to the es .9f cargo
normally carried on the trade concerned. The charges are ased either on the wei ht carried,
for heavy (dense) cargo, or on the volume taken up, for light cargo. The cubic metre is now
the standard unit (except in some USA trades where 40 cubic feet is still used). If the cargo
occupies less than one cubic metre per tonne weight , the charge will be based on weight
(W), or 'deadweight' . If more than one cubic metre then the charge is based on volume used,
measurement (M). A freight rate based on this formula is called a weight/measurement
rate (W/M) and the unit is a 'freight tonne'. This is still the usual basis of charging for LCL
and break-bulk cargo.

If a crate with a volume of one cubic metre containing copper bars is compared with the same
crate containing table tennis balls then, although the same volume onboard the ship is used,
the weight and the value of the goods in the crate is vastly different. When loading crates
containing copper ingots, the ship would be loaded to its marks long before all the space was
used. Each crate, therefore , has to achieve more revenue than those containing the table
tennis balls.

If twice as many of the latter crates can be loaded, each can be carried at half the cost
of the heavier crates to achieve the same revenue . However , in this case the ship may
well not be loaded down to its full weight capability (marks), and weight earning capacity
is lost.

The charges levied have to take account of this factor , and the rates set offer a 'weight or
measurement' (w/m) choice of which is at the Carrier's option. The Shipowner will therefore
'mix-and-match ' the rates to maximise earnings . The impact of weight against volume also
applies in container trades although in a slightly different way .

Valuable Goods
These attract a surcharge to reflect the extra value and the potential increase in the Carriers
liability if that value is 'declared' on the Bill of Lading.They will usually be charged, irrespective
of weight or volume , on an 'ad valorem' basis, ie the freight charge will be a percentage of
the declared value .
 TARIFFS AND PRICING

(b} Bunker surcharges , which are caused by fluctuations in the price of oil are charged
similarly. They are called the Bunker Adjustment Factor (BAF).

(c) Variations in any canal dues will eventually affect the rates.

(d) War risks cause heavy rises to insurance premiums.

(e) Port congestion , strikes and delays cause the Shipowner additional daily
costs.

(f) Rates are increased for livestock , dangerous , valuable, heavy or extra long goods
to accommodate the extra expense of handling these commodities.

These items , being variable, are usually included in an addendum detailing the extra costs
that these items may incur and the Carrier would pass them on to the Shipper. The cost of
the goods in the shops, or the products made by the goods will be increased to reflect the
extra cost of sea carriage.

9
8.1.4 c
\.,;
ference Tariffs
With the development of FAK (Frei9..ht All Kinds) and 'Lump sum or Bo·rates the traditional
form of freight tariff has fallen into disuse in many trades. However, it is important to have
an understanding of the structure and background of the traditional tariff which remains in
use in some important trades and certainly still influences the thinking behind other tariff
applications.

A Conference Liner Tariff is a published list of char es a lica..Q!g_to t e t es of cargo

normally carried on the trade concerned. The charges are ased either on the wei ht carried,
for heavy (dense) cargo, or on the volume taken up, for light cargo. The cubic metre is now
the standard unit (except in some USA trades where 40 cubic feet is still used). If the cargo
occupies less than one cubic metre per tonne weight , the charge will be based on weight
{W), or 'deadweight' . If more than one cubic metre then the charge is based on volume used,
measurement (M). A freight rate based on this formula is called a weight/measurement
rate (W/M) and the unit is a 'freight tonne'. This is still the usual basis of charging for LCL
and break-bulk cargo.

If a crate with a volume of one cubic metre containing copper bars is compared with the same
crate containing table tennis balls then, although the same volume onboard the ship is used,
the weight and the value of the goods in the crate is vastly different. When loading crates
containing copper ingots, the ship would be loaded to its marks long before all the space was
used. Each crate, therefore, has to achieve more revenue than those containing the table
tennis balls.

If twice as many of the latter crates can be loaded, each can be carried at half the cost
of the heavier crates to achieve the same revenue. However. in this case the ship may
well not be loaded down to its full weight capability (marks), and weight earning capacity
is lost.

The charges levied have to take account of this factor , and the rates set offer a 'weight or
measurement' (w/m) choice of which is at the Carrier's option. The Shipowner will therefore
'mix-and-match' the rates to maximise earnings. The impact of weight against volume also
applies in container trades although in a slightly different way.

Valuable Goods
These attract a surcharge to reflect the extra value and the potential increase in the Carriers
liability if that value is 'declared' on the Bill of Lading. They will usually be charged, irrespective
of weight or volume , on an ' ad valorem' basis, ie the freight charge will be a percentage of
the declared value.
LINER TRADES

y<f'ded Value
The Shipowner also takes into account a factor called 'Added value'.

All goods are carried from one country to another for two reasons:

1. They are needed and used by the Importer or the importing country in the state they
arrive e.g. Tinned fruit, machinery, railway lines, cement, etc

2. they are used as raw materials for the manufacture of something which can be sold or
used, e.g. rubber, grain, bauxite, iron ore.

Regardless of type, the imported item will be sold at a value either a little, or greatly more
than its value when loaded. The carriage by sea therefore 'adds value' to the commodity.

The same commodity may make two journeys. The first, as a raw material, would be from
a non-manufacturing country to an industrialised country , and the second journey would be
onwards, as a manufactured item for sale elsewhere in the world.

The point of the theory of 'Added Value' is that carriers recognise this·factor , and will adjust
the rates according to the amount the goods wilt rise in value after discharge . In other words ,
Liner Operators aim to charge 'what the traffic will stand'.

8.1.5
The Conferences set the amounts that members charge Shippers for carrying their cargo from
port-to-port or door-to-door, subject to competition rules, in the case of containers. The tariff
would list in alphabetical order every commodity that the Lines might expect to carry in that
trade and the rate to be paid for each commodity would be listed on a W or M or W/M basis.

The idea of a commodity based tariff may seem even more difficult to grasp when thinking
of containers. Given a container within certain weight limitations you can argue that what is
actually in the container is immaterial and this argument has gained momentum.

Taking advantage of the opportunities offered by independent Liner Operators, together with
changed business attitudes, Shippers have become unwilling to accept mandatory freight tariffs.
Sometimes playing one Line off against the other Shippers, particularly those of containerised
goods, now negotiate their own freight rates to the stage where, in many container trades,
detailed commodity based freight tariffs have more or less fallen into disuse.

In many trades Lines offer simplified commodity tariffs based on a 20' or 40' container, with
surcharges applied for special equipment (reefers, flat racks, open tops etc), plus out of
gauge, heavy, hazardous and high valued cargoes, but this will also be influenced by the
buying power of the particular Shipper. A rate that is based on a FCL container is usually
called a Box Rate and whether that rate is commodity related or not. When the rate is not
commodity related and is applied to any type of cargo it is known as a Freight All Kinds
(FAK) rate.

Government Influence
Generally, other than normal market forces, there has been little outside interference with the
way rate levels were established and negotiation was left to the Shippers' Councils. However,
some Governments require consultation and approval before permitting rate increases while
others have taken a stronger line. Although both the USA and Europe have granted Shipping
Conferences some exemption from their competition rules, they monitor the Conference
activity .

Some Governments try to influence the rates, the amount of influence depending upon the
politics of the Government concerned. The US Government requires that freight rates are
published so that there is no abuse of the Conference exemption from Anti-trust legislation,
but does not attempt to influence the actual level. Some other Governments will try to cause
inward rates to be high, and outward rates low, to discourage imports in an effort to improve

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the efficiency of national producers. Export side rates are kept down to encourage trade
outwards in other instances.

Adjustment Factors and Other Surcharges.

Adjustment factors, rate additionals and surcharges are various ways of compensating the
Carrier for extra expenses it incurs because of changes in circumstances that were not
provided for when the main tariff was published.They may compensate for short-term changes
in international economic conditions, local geographic or labour problems or the separation of
a particular expense for reasons of transparency in pricing. These charges may be expressed
as an additional rate per freight tonne or container , a percentage increase or a lump sum.

It should be noted that these adjustment factors are universally disliked by Shippers because
of the element of uncertainty that they introduce into freight rates. Shippers argue that they
are 'hedging' mechanisms to enable Lines to protect themselves against short run variations
in currency, bunker prices etc.

Many large Shippers with sufficient negotiating power absolutely refuse to have their freight
rates subject to any surcharges .

er Adjustment Factor (BAF)

The price of crude oil on international markets is subject to fluctuation and this applies
especially in periods of conflict. To allow for related fluctuation in bunker prices it is standard
practice for Conferences to publish, as and when necessary, a BAF value, applicable to their
tariff. When bunker prices become sufficiently stable the BAF is incorporated into the tariff
rates.

ency Adjustment Factor (CAF)

Almost all Liner tariffs have their charges quoted in US dollars but the Lines will incur costs in
many different currencies. To allow for this a complex calculation is made from time-to-time
and a CAF notified to the trade as a surcharge on the freight. (Occasionally a negative CAF
is declared). This CAF surcharge is quite separate from the tariff rules laying down how a rate
of exchange must be applied for paying freight in the local currency .

urcharges
If ports become very congested and vessels become subject to unusual delay it is the custom
for a Port Congestion Surcharge to be declared. Another reason for a port surcharge to be
applied is if the port becomes insecure as regards the safety of the ship or the security of the
cargo.

8.1.6 v5Pecial Freight Rates

Most Container Lines today apply Box Rates, which have some relation to the value of cargo.
How this is done is discussed later. However, whatever rate structure is used by the Carrier
there will be some reductions made to meet special circumstances.
a) Project Cargo.
A Shipper who wishes to ship a large amount of cargo may be able to achieve a
reduction in price. This is certainly the case if a long-term civil engineering project
contract is expected.
Civil engineering projects, such as the construction of a hydro-electric dam with all
the generating and transmission equipment, are inevitably very complex with a wide
variety of materials coming from scores of Sub-contractors . Such projects are also
very competitive so that the Contractor wants to make his price as keen as possible
with as few unknowns as can be achieved. To this end such a Contractor would
endeavour to obtain not only a reduced rate of freight, but also a simplified tariff
structure so that even without precise specifications of all the cargo the Contractor
would be able to make a fairly accurate estimate of the freighting element in his
costings.

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b) Special Commodity Quotations (SCQs).

These are usually applied for by Shippers when an unusually high demand occurs
for an already low-rated commodity or where the traffic might be lost to competition
from another region of the world able to produce or ship more cheaply. To do the
business at all the Shipper would need a specially low rate.

8.2 MODERN FREIGHT TARIFFS AND PRICING

In today's container trades the Lump sum box rate has become the norm. A box rate may
be linked to a simplified commodity tariff or to a particular client's cargo or it may be a FAK
(Freight All Kinds) rate where it is the same irrespective of the cargo. There are, however,
still a number of important commodity based trades such as Australia/New Zealand to Europe
and South Africa to Europe trades where the tariffs still exhibit features of commodity based
tariffs .

It is also important to understand the fundamentals of Liner tariff construction because all of
the major Liner carriers have pricing departments applying a high degree of both technical
skill and market knowledge to the problem of maximising the freight contribution , while at
the same time increasing market share. Note that it is contribution that is more important than
the gross revenue, ie how much is left to pay for the operating costs of the vessel and profit
after the direct costs of handling that container have been taken into account.

It is believed by some commentators that the battle for market share is also one of the
most important influences in determining rate levels, while others would say that seasonal
changes and imbalances within particular major trades , particularly the east - west routes,
have a greater influence.

8.2.1 Pricing Strategy

In most major deep sea container trades the commodity tariff has been replaced by lump sum
per container rates that are not directly determined by the nature of the cargo. A lump sum
or box rate is, as the name implies, a fixed amount payable for that container irrespective of
its weight or the measurement of the contents. It may still be linked to a commodity tariff or
it may be determined by negotiation with the client bearing in mind his volume of business
as well as the type of cargo. A FAK rate is also a lump sum but is not related in any way to
the container contents. Often FAK rates are used for establishing contracts with NVOCs or
Forwarders.

However, 'what the traffic will bear' is still very much a part of the pricing equation , although no
longer related only to the 'added value·of transport to the cargo but to a range of factors.

Many economists have attempted to apply economic modelling to the question of Liner rates.
Professor Sturmey of UNCTAD, some years ago, divided the rates in a commodity tariff into
five categories :

The top Alpha rates were those charged for cargo with a very high value to weight ratio and a
middling volume to weight ratio. A ship fully loaded with such a cargo would be loaded to it's
marks, full on space, and would make a very handsome profit on the voyage.

Beta rates would be similar but lower so only a modest profit would accrue.

Gamma rates would be reasonable but the volume to weight ratio would be unfavourable so
the ship would not be full both on weight and space.

Delta rates would cover all the direct costs of handling the cargo and the operating costs of
the vessel but offer little if any contribution to fixed costs and profit.

Epsilon rates are so low that the only justification for carrying is that they make a small
contribution to operating costs.

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These general principles are still applied today in container pricing. A container being carried
on lump sum rate basis falls into one of these categories.

It has been suggested that the shipping industry is now learning from and utilising some of
the techniques that have been used in the air passenger industry. Here 'epsilon' rate levels
are often used for high impact market promotion, although in fact only a very few seats are
available at that low price (and those are on limited flights at strange hours). A further modest
tranche of seats is available at 'delta ' rates. The main part of the aircraft is sold through tour
Operators at 'gamma' rates. The top tiers are represented by premium economy, business
and first class fares.

Applying this to container pricing is somewhat different as a shipping line is not selling to
individual consumers who largely have a 'one-off flight requirement. The important Liner
customers will have both repetitive and volume business which has to be retained and
this has led to a more sophisticated approach. Many Liner sales or customer service staff
complain about the extensive information that the pricing or trade management departments
want before a special quote will be given or a service contract offered to a particular client.

8.2.2 Physical Pricing Factors

There are a number of physical factors that need to be taken into account in determining a
pricing policy.

Weight
Many commodities such as chemicals , machinery , metal products, canned foodstuffs ,
drinks , semi-manufactured goods, etc can be stowed with more than 22 tonnes in a 20'
container. Most modern container ships have deadweight constraints due to stability
factors , they cannot carry too many heavy containers in the upper tier stows and have an
overall average space to deadweight ratio of about 14 tonnes per TEU including the tare of
the container. A 'tare' being the cost of Carriage when goods and Container are weighed
together and an allowance make for the weight of that container . Pricing may therefore
favour the lighter units. 40 ' containers will be offered a rate of perhaps only 1.5 times the
20' rate as they are restricted in terms of weight per TEU as the all up weight on most
routes cannot exceed about 25 tonnes because of inland restrictions (ie only 12.5 tonnes
per TEU). 40' Containers are frequently much lighter than this because they are used to
ship the bulkier cargoes .

High Cubes
These containers should and usually do carry a premium above the basic rate because they
are more costly and in limited supply. However, on certain legs of a route where there is no
great demand they may qualify for a cheaper rate because they are usually 'lightweight' or to
assist in repositioning the special equipment.

Dangerous Cargoes
A premium is applied to dangerous cargo because of the problems of ensuring proper
handling, stowage and separation from other cargoes as well as liability factors .

Special Equipment and Out of Gauge Cargo

A premium is applied to cover all types of special equipment. Not only is such equipment
more expensive than GP units, it incurs higher storage and repositioning costs because of
limited demand or one way use.

8.2.3 Geographical Factors

The physical factors affect the individual container while the geographical factors relate to the
ports of call and the ship's schedule .

Port Costs
The direct cost of the vessel's call at an individual port will vary due to three main factors :

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1. Cost of port dues and charges.

2. Cost of services, particularly tugs and Pilots.

3. Ease of access , such as where a long river passage is involved.

So that it would seem reasonable for higher rates to be charged to expensive ports. In practice
this is not always possible in container trades but the overall impact of cost might determine
whether a port is included in the direct call schedule.

Feeder Costs
Where a direct call is not made the additional handling cost of transhipment and the freight
cost incurred on the feeder vessel must be taken into account. The Lines' approach to this
will greatly depend on policy decisions about the overall importance of that port or country's
trade in terms of the Lines, or more often today the alliances' strategy. The essential question
is whether a full recovery of the feeder additional is attempted or whether the through rate is
kept basically in line with the other direct call ports in the same range.

Trade Imbalances
These arise from both economic and geographic factors . An economy based on the export
of heavy metals, chemicals or semi-manufactured goods, and the import of mainly consumer
goods will create a substantial surplus of space on the outward leg and of weight on the
inward voyage.

Seasonal crops will demand addit ional space only during their season, although this is
becoming less important with the development of long term storage permitting crops to be
held back and released to the market out of season.

8.2.4 Commercial Factors

It has already been said that the large multi-national manufacturing company wants 'one
stop shopping' from a limited number of suppliers, in exchange for which they offer a
share of their world-wide distribution . They also expect to get the most advantageous
freight rates.

Volume and Service Contracts

The Shipper with larger volume has greater purchasing power and expects a lower rate. In
the days of Conference commodity tariffs the mechanisms for dealing with this were slow,
clumsy and often ineffective as it usually meant reference to the Line, secretariat and a freight
committee of members. Today business moves fast and customers expect rate enquiries to
be dealt with in hours, not days. There is direct negotiation with the customer and in many
cases a service contract is established under which the Shipper 'guarantees' a minimum
volume to be shipped within a certain period, usually a year but sometimes a shorter period.
Conferences still arrange for service contract terms to be agreed among members so that
there is no internal battle over the conditions for these larger volumes . In the USA, trade ,
special rules apply to service contracts that must be filed with the FMC, as are other freight
rates. The US Ocean Shipping Reform Act 1999 considerably relaxed the regulation of ocean
carriage freights and, in particular, permitted individual confidential service contracts.

Trade Competition
The need for freight rate policies to provide assistance to exporters to be competit ive in
their markets was dealt with in discussing Conference tariffs, and this aspect still applies.
A small rate reduction may enable the Shipper to match competition from another part of
the world.

In today's world there are also commercial distortions due to consumer preferences , such as
the large movement of 'designer' branded goods that owe more to fashionable demand than
quality , price or country of origin.

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Shipping Competition
Finally, the line must look at the rates charged by its main competitors in the trade. This
does not mean just following the cheapest , comparisons have to be made with the quality
of service in terms of transit time, frequency , reliability, standards and breadth of service . At
the beginning of this chapter the battle for market share was mentioned. During the 1990s
this was a dominant feature of the market as consortia and alliances were changed and
reformed. Many of the players were very concerned to retain their existing share of the
market or increase it to reflect the extra capacity they were putting into the trade . Such a fight
for business caused substantial erosion of freight rates during that period, which even the
strongest Lines were unable to avoid .

8.2.5 Tariff Additional

CAF, BAF and congestion charges may also be added to lump sum rates. A number of other
additional charges may also be due in addition to the rate. These were described earlier in
this Chapter .

8.2.6 Tariff Rules

In any business it is important that when quotations are made the terms and conditions under
which the service is undertaken or goods provided are made clear to the customer . Liner
shipping is no exception. We have already seen that the B/L is the evidence of the contract
and the terms and conditions of carriage are set out on the reverse. Therefore , any freight
quotation must make it clear that it is subject to the terms and conditions of that Carrier's B/L.
However, in addition, there are a number of rules that are only related to monetary aspects
of the contract and which do not necessarily appear in the 8/L conditions .

For example, rules relate to:

The collection and return of the Line's container and the financial penalties incurred in
respect of Container detention, demurrage and quay rent.
Payment of freight in currencies other than the tariff currency and how this will be
calculated for both prepaid and collect freight.
Pre and on carriage of containers under carrier haulage.
Requests from merchants for changes to the ultimate destination of the cargo.
Documentation and other additional charges .
Forward validity of rates and notice of changes.
Forward validity of surcharges and additionals and notice of changes .

8.2.7 Stability of Freight Rates

Compared with the tramp market, Conference rates were stable , and did not react directly to
sudden market fluctuations . Ships in the tramp markets are 'price takers' in that the rules
of supply and demand affect them directly and almost instantaneously . However, Liners are
'price makers' in that they determine and publish their rates in advance.

Conference rates would normally be altered, at most, four times a year and in many cases
only once each year. Prices are almost invariably in US dollars, which assists stability . When
rates increase (decreases used to be rare), the increase is generally 'across the board'. This
was known as a General Rate Increase (GRI).

As mentioned earlier , temporary increases via surcharges (congestion , CAF, BAF, War
Risk, etc) are made but even these were preceded by a reasonable amount of notice. Such
alterations in rates are not necessarily always upwards, movements in the foreign exchange
markets can result in a 'negative CAF'.

General increases to the tariff were often the culmination of a very long series of discussions .
Shippers ' Councils exist in almost every region and they fight hard to prevent rate rises.

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Increases are almost always due to increases in the cost of ship operation. During the last
two decades, Owners have been reducing crew numbers and moving to cheaper registries
in desperate attempts to remain competitive. Many Operators have ceased to trade or have
been absorbed into other companies . At the same time the new economies of scale arising
from larger vessels and alliances have created an even more competitive situation.

The collapse of Conference rate fixing in the last twenty years , routes, and extreme
imbalances in certain routes, have led to the rate reductions of recent years , followed by
more recent spectacular growth in some areas and to a 'price taking' philosophy in the
Liner Trades. Rates have tended to be fixed for shorter periods and generally have shown
much less stability.

8.2.8 Additional Charges

k-bulk cargo
With only very rare exceptions, all Liner rates for break-bulk cargo are based upon the ship
paying for all the loading, stowing and discharging costs from crossing the ship's rail at
loading port to crossing the ship's rail at discharging port. It is for the Shipper to present the
cargo and the Consignee to take it away from alongside .

In practical terms, the Shipper usually delivers his cargo to the roadway side of a transit
shed and the Terminal Operator or Port Authority will deliver it to the ship, with the reverse
happening at discharging port.

The line Operator will automatically book the transit shed(s) as part of the arrangements for the
loading/discharging berth and it will be the ship's command/stevedores who give instructions
to the labour in the shed to bring the cargo to the ship's side. However, the cost of the move
through the shed will be the responsibility of the Shipper/Consignee respectively .

How the charge is actually levied will vary. In many cases the Terminal Operator actually bills
the merchant direct. In other cases all the charges are made to the Line, which has to add
the cost to the freight account at loading port or make a separate charge before releasing the
cargo at discharging port.

The names given to the charges vary from port-to-port although the name 'wharfage' is
the most common for export cargo. Sometimes the real name is replaced by simply calling
them 'FOBs' (Free On Board charges) . The plural is often used because there may be two
charges, one from the Contractors actually operating the transit shed plus a small charge
(port rate) charged by the port authority on every ton of cargo moved across its quays to
contribute towards basic upkeep.

Import charges are usually called 'delivery charges'. An additional cost of 'rent' may be
incurred if goods are left uncollected after an initial free period.

8.2.9 >tainer Cargo

The procedure and the names are different in the container trade and, as with break-bulk
cargo, some of the terminology differs from country-to-country.

Inland Haulage
In the case of FCL containers the merchant has the option to collect the empty container
from the Lines depot and arrange for the trucking to his premises and then on to the
loading terminal (known as merchant haulage) or to ask the Line to do this for him {carrier
haulage). The same alternatives apply at the port of discharge for delivery of the cargo. In
the case of merchant haulage the Line may make a 'lift on-lift off' charge to the merchant
to cover the cost of handling the empty container at the storage depot. Carrier haulage
charges usually include the cost of 'lift on-lift off' within the trucking rate and, in calculating
the haulage rate, the Line will also include some element of the cost of the truck returning
empty to its home base.

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 TARIFFS AND PRICING

While road haulage accounts for the greatest volume of inland movement both rail and barge
may be cheaper and more appropriate alternatives . In such cases there may be alternative
tariffs offered to the Shipper for using different modes of delivery. It has to be remembered
when comparing such costs that unless the actual Shipper/Consignees premises has its own
rail or waterway access there will still be a road movement involved.

It has to be assumed that , in offering Carrier haulage, the Operator wishes at least to cover his
costs. However, in certain circumstances , partly for historic, partly for competitive reasons, it
may not be possible to do so.

Prior to containerisation of the deep sea routes services were often offered to and from
a variety of ports in a single country. To achieve the econom ies of scale, and because of
limited investment, port facilities to handle container ships tended to be concentrated in a
small number of ports. There were pressures that customers should not have to pay more
because Shipping Lines were choosing to divert their cargo through a single more distant
port.

In response to such pressure, the majority of Conferences devised a system of inland charges,
so that the rate to/from the actual port of loading/discharge would be no greater than the cost
to/from the 'traditional ' port.

This approach to inland charges is referred to as 'equalisation' or 'centralisation' and in

many instances reflects a high degree of subsidy of inland costs. Nevertheless , the Operator
will have determined that it is more cost effective to subsidise the inland costs in this way
rather than make additional ports of call, incurring additional port and bunker costs and
extending the round voyage of the vessels.

Such systems were introduced for these historic reasons and many Operators and
Conferences have since attempted to reduce the extent of equalisation to improve their cost
recovery on inland operations .

However, equalisation continues because of the need to meet competition from another port
in the same area (Southampton , London and Felixstowe competing for cargo from any part
of the UK) or because a commercial decision has been made not to call at a port (or country)
that is served directly by a competitor .

inal Handling Charge (THC)

Container freight rates do not usually include the cost of handling the container through the
export or import port terminal. An additional terminal handling charge is made to cover this
cost.

At the advent of containerisation most container tariffs' sea freight charges included the cost
of lifting the container on and off the vessel. Terminal handling charges were later separated
because there are several advantages:

• It helps to protect the cost recovery of this item by separating it from freight rate
negotiations
• it enables the Operator to make different and transparent charges for high cost/low
cost ports
• increases in the charge can be more easily justified by direct reference to any
increases introduced by the port/terminal , although attempts to produce a 'neutral
formula ' with Shippers' Councils were unsuccessful
• additional facilities , e.g. for refrigerated cargo, can be covered by an additional
charge.
Terminal handling charges are normally levied per 20 ft or 40 ft container, irrespective
of commodity , unless the port/terminal levies additional charges for handling specific
commodities .

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 LCL Service Charges
From the merchant's point of view the service provided by the Line in the case of LCL cargo
is virtually the same as for break-bulk cargo. The 'FOBs' however, will be replaced by an
LCL service charge (normally be levied per 1,000 kgs/1 m3} which aims to cover the cost of
stuffing the cargo into the container and to contribute to the cost of moving the filled container
to the ship's side.

Container Demurrage and Quay Rent

Importers are encouraged to clear their goods quickly but, in the case of delays in clearing
container traffic, the tardy importer may find two charges made. First will be container
demurrage levied by the line according to the rates in the tariff.

Container demurrage is often deliberately set at substantially more than the rate at which
a container could be rented. Controlling containers, having them in the right place at the
right time and having the right stock levels, is difficult enough without having to cater for the
possibility of some of them being out of circulation for indefinite periods. Consequently, a
somewhat punitive rate is charged to discourage importers from using ship's containers as
temporary warehouse space.

ln addit.ion to demurrage a charge is made by the Terminal Operator . either directly to the
importer or through the Line, before the container is released, usually called Quay Rent. A
few days are always allowed free of charge but, on the expiry of that time , a daily charge Is
made. Some terminals have a sliding scale with the charge becoming increasingly punitive
the longer the container remains on the quay. The punitive rate levels are to avoid congestion
on the terminal. It is intended to be a transit, not a storage , area.

ContainerNehicle detention
When a container attends the Shipper's premises for stuffing or stripping a fixed time is allowed
for the cargo handling operation to take place. Around four hours is a typical maximum. If this
time is exceeded a penalty charge per hour or part is applied. If the delay is very prolonged t his
charge may also be increased to allow for driver's overnight accommodation . These time limits
are very critical in many countries because of strict restrictions on driver's working hours.

Documentation Charges
On export cargo a 'documentation' or ' B/L' charge will be made for producing the B/ Ls
or Waybills for the Merchant, as well as extra charges for any other documentary work
undertaken such as consular documents , certificates of origin, customs etc. On import cargo
an 'import service charge' is made to cover the administrative costs of notices of arrival,
container delivery orders etc.

8.3 SELF-ASSESSMENT AND TEST QUESTIONS

Attempt the following and check your answers from the text:
1. What are BAF and CAF, why are these charges made?
2. Identify the main physical and geographic factors that impact on pricing.
3. Explain how trade imbalances arise and their impact on freight rates.
4. Explain the terms 'carrier haulage' and 'merchant haulage' .
5. What is the difference between container demurrage , detention and quay rent.

Having completed Chapter Eight attempt the following and submit your essay to your Tutor :

'The application of FAK rates instead of Commodity Box Rates does not assist in development
of new trading opportunities." Discuss whether or not this statement is true and identify how
freight rates and trade development might interact.

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 Chapter 9

FINANCIAL ASPECTS OF THE IMPORT/EXPORT

BUSINESS
9.1 INTRODUCTION
9.1.1 The Exchange of Goods
The buying and selling of goods , no matter what kind or where it is done, involves the creation
of a 'contract' or agreement between two parties, one offering goods for sale and the other
offering something in exchange for those goods. It does not matter how many other Agents
become involved.

The contract created, therefore, binds the two parties together , and does not necessarily
have to be in writing . A purchase in a shop is an example of a straightforward contract of
sale, although in many countries such a contract today involves certain other elements
required by the Sale of Goods legislation , such as refunds or replacement for faulty
goods.

Both sides of the contract have an obligation and, if either party fails to fulfill its obligation,
there are remedies in law that can be taken to the Courts if the matter is serious enough.
With both parties in the same country the legal remedies can be easily enforced . Normally,
one party requires money and the other requires the commodity being offered in exchange
for the money.

Within the UK this is simple, we can use credit cards, cash, cheques or one of the various
forms of electronic transfer . Sale and purchase contracts or 'deals' are virtually instantaneous
in a shop, but take a few days longer when goods are bought by mail order for example .

The situation with international transactions , however, is rather different due essentially to
three factors:

i) The distances involved.

ii) The large sums of money that often have to be passed from buyer to seller.

iii) The difficulty in enforcing legal remedies in a different jurisdiction.

The term 'finance of international trade' embraces two distinct activities:

i) The arrangement of payments for imports and exports.

ii) Providing the maximum conservation of cash-flow for one party or the other,
providing the optimum conservation of cash-flow for both parties.

Liner Operators and their Agents need to have an insight into some of the merchants'
problems regarding the financing of their trade to provide a supportive service.

emember that cargo shipping is a derived demand, so if the Carrier fails to satisfy the
erchant there is little point in running the service.

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LiNER TRADES

9.1.2 The Transfer of Funds from Country to Country

The ease with which money can be sent from one country to another varies considerably.
Some countries have no barriers at all while others have extremely strict exchange control.
The stringency of the control is usually a reflection of the balance of payments weakness of
the country concerned or the extent to which it operates a central economy .

Where no controls are imposed,there are a variety of methods.The simplest of all is a cheque
or banker's draft drawn on the buyer's bank in the currency of his own country. Although
this is the most straightforward for the payer, it creates some problems for the payee. His
bank has to sell the currency in which the cheque is drawn and credit the payee's account
deducting the charges which the bank will make for providing this service. In the case of a
cheque (rather than a banker's draft, which is reckoned to be as good as cash) such funds
will usually be credited 'with recourse' which means that the payee's bank reserves the right
to cancel the credit should there be any irregularity in the cheque being honoured by the
payer's bank.

A more satisfactory method is for the payer's bank to effect a credit transfer to the payee's
bank. Such a transfer may be done by any of the usual methods of communication , including
mail, cable, telex , fax or via computer links. Naturally, the charge the banks make is
commensurate with the speed of transfer demanded. One particular advantage of a credit
transfer is that the payer can arrange to absorb all the charges even to the extent of stipulating
the precise amount that should be credited to the payee's bank in his own currency.

This can be very important to an Agent who requires payment for disbursement and naturally
wants the exact amount paid out on the ship's behalf.

9.1.3 Methods of Payment in International Trade

Just how payment is to be effected will be an important part of the contract for the sale of the
goods concerned. Where the buyer and the seller are part of the same group of companies ,
or when the two merchants are well known to each other and have a high degree of trust in
each other, they can operate open account trading and the methods of transfer mentioned
in the previous section are perfectly adequate. There remains one problem, when should
payment be made?

Both parties will wish to conserve their cash-flow to the maximum extent so that an ideal
method for the Shipper would be 'cash with order'. Conversely the Buyer would be happier
with 'cash on delivery', but neither of these is generally satisfactory because one or the
other will feel his money is outstanding too long.

A more usual method with open account trading is for the parties to agree to Direct, which
requires the seller to airmail his invoice and the B/L as soon as shipment has been effected
and the buyer transfers the cash on receipt of the documents .

Open account trading particularly lends itself to short sea passages, when the voyage would
be completed long before documents could be processed through the banking system if a
Documentary Credit were involved.

The assistance of Liner Operators or their Agents may be sought when merchants are using
open account trading. In cases where the Consignee will not want to sell the goods to a third
party, there is an ideal situation for the use of a Sea Waybill. There is no point in having a
document of title in circulation when one is not required. In the case of container shipments ,
a 'received for shipment' B/L may be adequate for the merchants' needs.

Liner Operators and their Agents should ensure that their sales staff are alert to the need
to be aware when their customers are operating an 'open account' trading . They can then,
diplomatically , check whether the Shipper is fully aware of the existence and possible
advantages of the alternatives to 'shipped onboard' B/Ls.

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 FINANCIAL ASPECTS OF THE IMPOAT/8cPORT BUSINESS

9.1.4 Bills of Exchange

A detailed study of this method of payment is beyond the scope of this Chapter but those
working in Liner Trades should be aware of their existence. In simple terms, this method of
payment is rather more secure than ordinary open account trading but not so protected as a
Documentary Credit.

In essence a document is prepared that resembles a cheque drafted on plain paper. Where
it differs significantly from a cheque is that, in most cases, it stipulates that payment is to be
made at some future date (e.g. 90 days).

The advantage of this method is that it permits both parties to conserve their cash flow to the
maximum . The buyer will not have his account debited until the 90 days have expired so that
he could well have retailed the goods before having to pay for them. The seller may choose
either to wait the 90 days and be credited with the full amount or (because Bills of Exchange
are negotiable) may negotiate with a bank the sale of the bill at slightly less than its face
value (known as discounting the bill). Assuming the seller allowed for the discounting charge
when negotiating the sale of the goods, both parties can conserve their cash flow without
penalising the other.

9.1.5 Documentary Credits

These are often referred to loosely as 'Letters of Credit', but with a Letter of Credit one may
only have to identify oneself to draw from it. A Documentary Credit is so called because it
requires several documents to be presented to receive payment. The two expressions may
be treated as synonymous in a shipping context.

Documentary Credits are the most frequently used method of payment for long distance
commerce and, during the course of the sale negotiations, the seller must stipulate that
payment shall be via a 'confirmed, irrevocable Documentary Credit'.

'Confirmed' in this context means that a bank in the seller's country has to agree that even
if both the buyer and his bank become bankrupt, the confirming bank will pay provided all the
stipulations are adhered to by the Seller.

'Irrevocable' means that once opened the Buyer cannot cancel (revoke) the credit.

It is sensible for the Seller to negotiate in detail with the Buyer to ensure that unnecessary
terms are not included in the credit with which it may be difficult for the Seller to comply.
Having reached agreement the Buyer arranges with his bank to open the credit and this is
transmitted to the confirming bank in the Seller's country.

When the goods have been duly loaded the Seller gathers together all the documents
stipulated in the credit and presents them to the bank. The bank compares them meticulously
with the instructions sent by the issuing bank and it is this close scrutiny that may have an
impact on the Line Operator or Agent.

The confirming bank has no discretion whatever . It has to obey its instructions to the letter
as the slightest variation between the confirming bank's instructions and the documents
presented by the Seller will result in payment being refused. A major London bank has
stated that nearly 80% of Documentary Credits result in a refusal on first presentation.

It will contribute nothing to the goodwill of the carrying Line if the bank's refusal to pay under
a Documentary Credit is due to a failure by the Liner Operator or Agent to word the B/L in
accordance with the Shipper's instruction.

Similarly , anything endorsed on the face of the B/L that remotely resembles a 'clause' may
result in the bank refusing to pay. Some examples of this have the appearance of becoming
a little ridiculous.

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LINER TRADES

The confirming bank has no discretion because it is that total obedience to instructions that
protects the Buyer. Furthermore , that obedience has to be almost robotic to cope with the
thousands of Documentary Credits that have to be processed every day under the pressure
of ship transit times becoming shorter and shorter . UCP600, Section 14, provides guidance
for banks on examination of documents .

Despite this care, there have been some spectacular frauds with Documentary Credits where
the criminals have succeeded in producing apparently genuine documents for non-existent
cargo even having been 'loaded' on a non-existent ship or a genuine ship which was on the
other side of the world at the material time.

Some people have been quick to blame the banks when such frauds have taken place
but if the bank had to include checking the whereabouts of every ship involved in every
Documentary Credit the cost would become prohibitive and/or the whole system would grind
to a halt. Ships are already tending to move more quickly than the paperwork .

When Documentary Credit frauds have been investigated the weakness is found to be
gullibility , ineptitude or collusion on the part of someone connected with the Buyer.

Perhaps the biggest mystery is why Buyers are still encouraged to have the credit insisting
upon a set of three original B/Ls and then quite rightly insisting upon all three being presented
by the Sellers to the confirming bank. Even if the Buyer wishes to endorse his title to the
goods to another, that endorsee will also want all three bills as there would be no secure title
without them.

These specific criticisms should not be taken as a suggestion that the banks are being
irresponsible, far from it. The vast majority of the millions of Documentary Credits overcome
any initial errors on the part of the Shippers and no better way of financing international trade
has been found as yet.

There is close liaison between the major banks and the International Chamber of Commerce
(based in Paris) and it is the latter body that publishes, in several languages, the invaluable
booklet entitled 'Uniform Customs and Practices for Documentary Credits'. This
document is revised from time-to-time; the current edition is number 6, so the abbreviated
title is UCP600. The rules it embodies are now very widely adopted.

UCP600 stipulates the types of document recognised, which include Bills of Lading, Sea
Waybills and Multi-modal Transport Documents (as well as others such as Air and Road
transport documents which do not concern this publication) . The requirement for 'shipped on
board' B/Ls is still an essential feature of the documentary system.

When UCP600 came into effect in July 2007 the structure and numbered clauses were altered
to ensure documentary credits were more commercially friendly than before in UCP500. It
is recommended that you read through all clauses to become familiar with all articles for
international trade & related documents . It is not the intention of this course to go through
each article in detail but we would draw your attention to the following articles which are in
plain English so the text is not repeated or further explained here but the detail of each needs
to be read and understood.

Article 5 - Documents v. Goods, Services or Performance .

Article 14 - Standard for Examination of Documents.
Article 16 - Discrepant Documents, Waiver and Notice.
Article 17 - Original Documents and Copies.
Article 18 - Commercial Invoice.
Article 19 - Transport Document Covering at Least Two Different Modes of Transport .
Article 20 - Bill of Lading.

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 FINANCIAL ASPECTS OF THE IMPORT/ExPORT BUSINESS

Article 21 - Non-Negotiable Sea Waybill.

Article 22 - Charter Party Bill of Lading.
Article 26 - "On Deck", "Shipper's Load and Count", "Said by Shipper to Contain" and
Charges Additional to Freight.
Article 27 - Clean Transport Documents.
Article 34 - Disclaimer on Effectiveness of Documents .

All of the above Articles are written in plain English so the text is not repeated or further
explained here, but the detail of each needs to be read and understood.

The line or its Agent must always recognise how important it is for the face of the B/ L to
describe the goods in precisely the wording the Shipper requires. This does not mean,
of course, that clean B/Ls should be issued regardless of the condition of the cargo, that
problem was dealt with in an earlier Chapter. It is also important to ensure that the lengthy
cargo descriptions sometimes required in Letters of Credit are not copied into the B/L as
this may well include statements as to value that could affect the Carrier's liability under the
HagueNisby Rules.

Under UCP600 all letters of credits are now irrevocable (Article 3), ie once it has been opened
the buyer cannot alter it in any way without the Seller's consent. Revocable credits are now
excluded from UCP600. It will certainly have an expiry date after which it becomes null and
void. It may also include stipulations about a latest shipment date, which may be before the
final expiry date.

There will always be occasions when Sellers encounter delays in manufacture and will be
arranging shipment very close to the final shipment date or expiry date of the credit. It is easy
to visualise the frustration , possibly disaster, if the goods are on passage but the credit has
expired. The Shipper's money is tied up in the goods on their way to a distant country while
the only person who has title to the goods is there, at the loading port, with an 'order' BILbut
no immediate way to obtain payment. Just as easily can one visualise the strong bargaining
position in which the Buyer now finds himself.

The likelihood is that a Shipper , finding himself in this unfortunate position, will seek to obtain
from the Liner Operator or his Agent , a BIL that falls within the expiry date of the credit. A
Letter of Indemnity might even be offered in exchange for such a document , which is known
as a pre-dated B/L.

There could be other reasons for seeking a pre-dated, or even a post-dated BIL. These
include a change in the price of a commodity where a higher profit could be gained by proving
that shipment had taken place on a different date to the correct one. Or the expiry of an
import or export licence might also lead to such a request.

All of these practices are fraudulent and a Liner Operator or his Agent acceding to such
requests would be guilty of condoning the fraud and liable to possible criminal and civil
prosecution. The International Group of P&I Clubs has also made it clear to members that
cover is withdrawn if the Carrier is guilty of such malpractices.

9.1.6 Who are the 'Merchants'?

The expression 'merchant' has been used extensively in this text and this may be a convenient
stage to ensure that you can identify and differentiate between all the many and various
people/entities falling under that general heading.

Shippers
This is the first name and address to appear on a B/L or Waybill. So self-evident is the
Shipper's role that there is a temptation to leave it at that. However, apart from being a very
important person to the Line in marketing terms the Shipper is important legally. Remind

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LINER TRADES

yourself of the three functions of the B/L (two in the case of a Waybill) and number two is
'evidence of a contract'. No matter how simple the establishment of the contract is, just a
telephone call in many cases, a contract needs two identifiable parties. The carrier is one,
the Shipper is the other .

The Shipper may well not be the one who delivers the goods to the port. Say the Shipper is an
export car dealer who would have negotiated the sale with the distant buyer. Such a dealer
could well have purchased the car from the makers on a FOB basis so that the manufacturer
delivers it to the docks but does not appear on the B/L.

Although the Shipper is important as the first party to the contract, he may disappear from
the scene very quickly. If the sale is FOB his job is finished as soon as the goods cross the
ship's rail and the ship becomes the custodian of the goods on the Consignee 's behalf. Even
in a CIF sale the Shipper will have been careful to ensure that the policy of insurance is
assignable to the Consignee .

Where the sale is covered by a Documentary Credit, the B/L will have been made out To
Order' and it is important that the Shipper endorses the bill so that the title is available to the
bank as security for payment.

However, no matter how quickly the Shipper removes himself from the scene, it is he who
was the contracting party but the Liner B/L permits him to assign by endorsement both the
benefits and the liabilities under that contract.

Problems may arise especially if the Line has given the Shipper credit, ie has delivered a
'Freight Paid' B/L against the promise of payment, not the actual money. It is important to
ensure that the Shipper is indeed the one with whom the contract was made. Sometimes a
forwarder will show his name as the Shipper when he has no authority from the Exporter to
do so. Conversely , a Forwarder may claim to be only an Agent and will enter an exporter's
name in that box only for the Line to discover that the Exporter was under the impression that
he had a contract with the Forwarder not the Line.

There is nothing basically wrong with a Forwarder appearing as the Shipper , if that
Forwarder is a genuine NVOC. It is important to remember is to exercise care when
granting credit because once a B/L is endorsed 'freight paid', the Line has no lien on the
cargo but has an absolute obligation to deliver that cargo to the B/L holder at the port of
discharge .

Forwarders
I

The role of a Forwarder is often ambivalent in that he may be clearly an Agent for the Shipper
so far as the export Customs entry is concerned and may indeed still be an Agent when
lodging the B/Ls showing the actual Exporter as the Shipper. However, if the Forwarder
undertakes to get the goods from the factory to the docks he will probably be, technically ,
a contractor . In other words , a Principal (carrier) rather than an Agent for that part of the
carriage.

Forwarders in many parts of the world take on far wider duties as contractors including, for
example, most of the booking of cargo, negotiating concessionary rates or rebates where
available and arranging the road, rail or barge haul from the hinterland to the port. Often it is
the Forwarder who decides which port of exit will be used.

Forwarders also have a vital role at discharging port where the, often complex , ritual of clearing
customs and paying duty needs expert knowledge if delay and incorrect duty payments are
to be avoided .

In many cases the Forwarder will be the one who will apply to the Line for the release of the
cargo and it is vital to ensure that the B/L has been properly endorsed by the Consignee to
enable the cargo to be legitimately released to the Forwarding Agent.

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 FINANCIAL A SPECTS OF THE IMPORT/EXPO RT BUSINESS

NVOCs and NVOCCs (Non-Vessel Operating Cargo/Common Carrier)

The main difference between an NVOC and a Forwarder who acts as a Freight Contractor
is one of approach. The Forwarder, even though he loses the pure agency status through
taking on contractual commitments in his own right, tends to represent the Exporter and
seeks to handle all his cargo regardless of destination . The NVOC advertises himself as a
Contractor to specific destinations (in law described as 'deemed to be the carrier though not
actually the Carrier') and will also carry goods presented by other Forwarders.

As the role of the NVOC has become more common in international trade there has been
an increasing need to identify more clearly who does what and who is responsible for
the carriage of goods. Increasingly government and intergovernmental organisations
have adopted two terms to separate the functions of the NVOC from those of the actual
Carrier.

Contracting Carrier
This is the term used to describe the party who makes the contract of carriage with the
merchant , ie the NVOC or, in some cases, a consortia or alliance member, issuing B/Ls in
respect of cargo carried on another party's vessel. The contracting Carrier is responsible to
the Merchant for the proper performance of the contract and is the person against whom
any claim for loss or damage will be made. The contracting Carrier is the Carrier recognised
under UCP600.

Performing Carrier
This is the actual Owner or Operator of the vessel carrying the goods. Its contractual
responsibility is to the NVOC or slot Charterer and not directly to the Merchant.

NVOCs are principally a product of the container trade especially when the Lines themselves
would rather not bother with LCL cargo.

Generally it is sufficient to refer simply to NVOCs or even just NVOs (Non Vessel Operators).
The extra 'C for 'common' is due principally to American influence. Under US law such operators
who are offering their services to all comers are Common Carriers and must be registered
with the US Federal Maritime Commission and comply with Tariff filing requirements and
the US Ocean Shipping Reform Act in the same way as the Liner operating companies are
required to do. In some trades the second 'C is still included to denote non-vessel operating
'container ' Carriers.

Consignees and Endorsees

These are taken together because of the essential negotiability of a B/L, so that the named
Consignee may well not take delivery of the cargo because he has endorsed the B/L and so
handed title to someone else.

The important point to watch is that if the B/L is made out to a named Consignee then he
will have to endorse the bill if someone different is going to collect the cargo. Remember
there is no limit to the number of times a B/L can be bought and sold so long as it is properly
endorsed each time.

Notify Party
Often, especially when a Documentary Credit is involved, there will only be the words 'To
order' in the Consignee box and below that will be the name and address of the Notify Party.
Usually he is the actual Consignee but cannot assume that role until payment has been
made and the Bill of Lading handed over by the bank which issued the Letter of Credit. You
may ask why make out the B/L 'to order', with the theoretical risk that it could fall into the
wrong hands? Why not put the bank's name in as the Consignee and let the bank endorse
the bill when payment has been made? However, the bank only wants the B/L as security
for payment, what it does not want are the liabilities of a Consignee and will only reluctantly
adopt that role if the intended Consignee becomes bankrupt.

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A ' Notify Party' has no legal status under a B/L and, in fact, the Line is under no obligation to
communicate with whoever is named in that box. All Lines, however, take good care to do so
for sensible commercial reasons.

9.2 INTERNATIONAL CONTRACTS OF SALE - INCOTERMS

It is important that the Line knows who will pay the freight and any additional charges .
Will the freight be paid by the Shipper, 'prepaid', or will it be paid by the Consignee at
destination 'collect'? In some cases the Shipper may also wish to pay the Carrier haulage
at destination ; in other cases he will only wish to hand over the cargo to the Carrier at his
factory and the pre-carriage and THC at loading as well as at destination will be payable
by the Consignee .

The terms of the sale between the Shipper (seller) and the Consignee (buyer) will determine
who pays which items. It must be clearly understood that these terms relate to the sale of the
goods and not to the contract of carriage.

There are many standard terms of sale in everyday use and in order to ensure these terms
are universally understood , the International Chamber of Commerce publish an agreed
set of definitions called lncoterms, the current edition is lncoterms 2000 . Outlines the
main lncoterms used in Liner Trade cargo are set out below. These are a guide to the
Buyers' and Sellers' responsibilities under the individual contracts. A list of INCOTERMS
with brief definitions appears in Appendix 13 but readers should also refer if possible to
the International Chamber of Commerce publication INCOTERMS 2000 for further details
of the other terms.

EXW - Ex Works
Under these terms it is the responsibility of the Buyer to collect the cargo from the Shippers
premises . It follows from this that it is the Buyers responsibility to arrange for all transport
from the Sellers premises to the ultimate destination. This also often means that all freight
and charges including pre-carriage and THC (or FOBs for break-bulk cargo) will be payable
at destination.

FOB - Free on Board

One of the most popular International Sales Contracts is the FOB form. The Seller has
responsibility to present the goods for loading over the ship's rail or in the case of container
traffic to the Terminal. They then become the Buyer's problem. Freight and insurance, being
concerned with matters after loading, are the responsibility of the Buyer.

The Buyer is under a duty to nominate the port at which the goods are to be loaded. He is
also responsible for nominating the vessel so from the point of view of marketing a Liner
service it is the Buyer who controls the cargo and has to be persuaded to use a particular
Line. This nomination must be made within the time specified in the contract. If the nomination
is ineffective for some reason, the Buyer may renominate provided always that the contract
time period has not expired. The Buyer usually books the space on the vessel he has
nominated.

Once the nomination has been made, it is the Seller's duty to deliver the goods for loading.
Risk will pass at the same time, and the price will become payable. Sometimes the passing
of property will be delayed. For example , if the transfer of the Bill of Lading is delayed, for it
is that document which signifies the transfer of ownership.

It is for the Buyer to arrange his own insurance, although the Seller must give the Buyer
sufficient information to enable him to effect the insurance. If the Seller fails to give the
information, the risk will remain on the Seller.

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 FINANCIAL ASPECTS Of Tl-IE IMPORT/EXPOR T BUSINESS

9.2.1 CIF (Cost, Insurance and Freight) and CFR (Cost and Freight)
CIF is still the most popular form of International Sales Contract. As its name implies, it
involves the Seller in the arrangement of the carriage, the insurance as well as the provision
of the goods. The price of goods CIF will obviously be considerably higher than goods FOB.
The contract is based on the discharge port rather than the load port.

The Seller is under an obligation to ship goods of the contract description, in accordance with
any further stipulations in the contract of sale as to time, place, etc.

He must arrange a contract of carriage on the usual conditions for the trade in question.

Similarly, he must arrange an assignable insurance for reasonable value on the usual terms
for the trade in question .

He must then prepare an invoice for the goods which he is selling in accordance with any
stipulations in the contract of sale.

Finally, the Seller must tender all the relevant documents to the Buyer, his Agent or his bank.
The relevant documents are the Invoice, the Bill of Lading and the Policy of Insurance.

The Buyer must accept the documents and pay the price. He may refuse to accept the
documents if they are not in accordance with the contract, though they may be re-tendered
by the Seller in a satisfactory condition within the contract period. Property passes when the
documents are transferred . Risk, however, and this should be specifically noted, is deemed
to have passed at the moment of shipment. If anything has happened to the goods during
the voyage , the Buyer will be protected as he will receive the insurance policy when the
documents are transferred.

It should be noted that the transfer of the document is, in law, the transfer of the goods, so
even if the goods are lost, the sale can be performed by the transfer of the documents. The
CIF contract has been judicially described as a 'contract for the sale of goods performed by
the sale of documents '. This is an apt description .

The CFR contract excludes the requirement for the Shipper to arrange Insurance and the
buyer takes on this responsibility, otherwise the terms follow CIF.

DOU - Delivered Duty Unpaid

This is the opposite of EXW. The Seller is responsible for delivering the cargo to the Buyer's
premises at destination. The Seller is therefore responsible for both pre and on-carriage , as
well as sea freight and insurance. The buyer is, however, responsible for the import customs
clearance of the goods and the payment of any import duty or tax. There is a further term
DDP (Delivered Duty Paid) when the Seller also takes this responsibility.

lncoterms and combined transport

It might be considered that the two terms EXW and DOU would be those best suited, particularly
to FCL house-to-house traffic as these terms provide for one party to be responsible for the
whole of the transport arrangement. There are reasons why FOB and CIF are still the more
popular.

i) Tradition still plays a part and even today the legacy of break-bulk shipping with the
transfer of goods at the ship's rail lingers on.

ii) It is often more convenient for the Seller to have control of the pre-carriage, he can deliver
to the port when it best suits him. He also can ensure that export customs formalities are
properly complied with including recovery of any export tax refunds or VAT rebates.

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iii) It may also be more convenient for the Buyer to have control of the delivery to his
premises including the option of delaying the cargo at the terminal or ICD if it suits him.
Similarly he has control of how and when he clears Customs and pays tax and duty.

iv) In some countries with strong exchange control rules it is not permitted to pay for pre or
on-carriage in another country .

9.3 SELF-ASSESSMENT AND TEST QUESTIONS

Attempt the following and check your answers from the text:

1. What is 'open account' trading?

2. Why is a Documentary Credit often preferred to open account trading?

3. What does 'irrevocable' mean when applied to Documentary Credits?

4. . When might a Shipper be advised to use a Sea Waybill rather than a Bill of

Lading? 5. What is the main difference between a freight forwarder and an

NVOC?

6. Why does a bank prefer not to be shown as the Consignee in a Bill of Lading?

7. Does a notify party have any 'rights' under an order Bill of Lading?

8. What risk does a Carrier run if it gives a 'freight paid' Bill of Lading to a Shipper without
actually getting the cash?

9. When does the responsibility for the cargo pass from Seiler to Buyer under the following
INCOTERMS: EXW, DOU, FOB, CFR

Having completed Chapter Nine attempt the following and submit your essay to your Tutor:

Comment upon all the stages a Combined Transport Bill of Lading drawn 'to order' will go
through from starting as a blank form until finishing as 'accomplished ' in the Liner Operator's
files .

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