Determining freight cost in Ocean/Sea freight

A single voyage charter is usually priced by tonnes. Cost targeting depends on the agreed term of trade.

  • When seller of a cargo is a shipper, it is usually CIF or CFR – agreement made on commercial terms. In this case, seller is responsible for transportation costs to a specific port with or without cargo insurance.
  • In the second common case, is FOB or FAS – agreement, in which case seller delivers goods to the ship or to the dock next to ship. Other costs are paid by the buyer of cargo, which also operates as a shipper.

Regardless of freight payer shipping company price according to current market conditions. Level depends on daily market in the area and it controlled by the tonnage balance of supply and demand, in practice the lack of it. Freight includes all ship costs including port visits unless otherwise agreed.
Shipping cost calculation is based on, in addition to expenses, the trip length and time use.

  • Loading and unloading estimated time, method of calculation and compensation for going under or over time, agreed in the charter agreement. In the case, where trip time goes under agreed, shipping company pays the difference to shipper and if trip time is exceeded, payment is given to shipping company, respectively.
  • Costs of cargo handling in the port are the shipper’s costs, but for example, use of ship cranes can be agreed with the shipping company.
  • If the timing of a transport need is well known in advance, freight rates can be locked in the derivatives market.

If there is a greater transport need, ship chartering can be considered for successive trips. However, one should find out whether to transport the desired amount one time, because ton freight is cheaper the larger the ship is. Economies of scale is used in dry bulk shipping.

However, it may be that the entire batch can not be delivered to port at once, because port’s cargo handling capacity is insufficient or waterway is not deep enough for larger vessels. Due to waterway restrictions the most economical option can be that the largest part of cargo is loaded at the dock to a large vessel and to waterway maximum draft. After this, vessel is transferred either to the anchor or to another suitable place where the rest of the cargo is transported in a smaller vessel and being transferred to awaiting vessel.

The method works also the other way around when part of the cargo needs to be unloaded so the draft of a vessel corresponds to requirements of waterway leading to the port.
The operation requires special expertise of the ships’ crews as well as some special equipment. In this situation, it can be appropriate to transport the whole shipment in several successive batches.