Types of Shipping Costs: Everything you need to know to understand your freight costs

A Complete Freight Expense Guide

Shipping costs are one of the most misunderstood or miscommunicated terms in shipping and freight. If not quoted, monitored or controlled properly, it could turn out to be a nightmare for the BCO (Beneficial Cargo Owner also known as Shipper) or Freight Forwarder. This is why we take a look at the various types of shipping and the costs involved with it.

We will take a look at some of the more well-known shipping costs including cartage, wharfage and the bunker adjustment factor. However, there are several other costs which may be imposed on the customer and we will look at those costs in the second part of this article.

Costs for different types of shipping: Overview

In simple terms, shipping costs are the costs for the movement of cargo from Point A to Point B. Depending on the type of contract, multiple components may be covered in the shipping costs.

In its broadest form to cover a door to door movement, shipping costs can be divided into ocean costs and landside costs both having its own individual components.

Ocean costs have many components but the main costs are Ocean Freight; Bunker Adjustment Factor (BAF); ISPS; Emergency Risk Surcharge; Destination Arbitrary; Low Sulphur Surcharge; Peak Season Surcharge; Currency Adjustment Factor and more.

Landside costs may be further split into port, road, rail, documentation, customs etc each of these categories having their own costs such as Terminal Handling, Wharfage, Cartage, Chassis Usage, Tri-axle, Railage, Documentation Fee, Delivery Order Fee, Customs brokerage fee etc.

Explanation of Primary costs

Ocean Costs

Ocean Freight costs cover the cost of movement of the cargo while it is on the water. Freight costs are charged per container whether 20’ or 40’ and the cost is calculated from loading at a port till discharging at the other.  Each carrier or shipping line charges their own freight for the same route and these costs are depending on the operating costs of the carrier such as ship operation, container costs, operating costs and more.

Bunker Adjustment Factor (BAF) relates to the cost of the bunker or in other words, the fuel for the ships. Various shipping lines use various methods of calculating the BAF which in the past used to be a percentage value of the freight, but in recent times is being charged on a per 20’ or 40’ basis. Depending on the oil price the BAF fluctuates.

ISPS is the abbreviation for International Ship and Port Facility Security Code (ISPS) and this is charged by the shipping line for the monitoring and protection of the ports and harbors post 9/11.

Low Sulphur Surcharge also relates to bunker but as part of the green initiative and to reduce carbon emissions, a lot of the ships use fuel which has low Sulphur content which is more expensive than the normal bunker fuel and therefore this charge is implemented.

Currency Adjustment Factor (CAF) relates to the cost charged by the shipping line to cover against the exchange losses they may experience when converting costs and revenues from various currencies into US Dollar which is the main trading currency globally. For example, freight maybe quoted in EUR but the shipping lines costs are in USD.

Landside Costs

Terminal Handling Charge (THC) is charged by both the load port and discharge port and that is charged by the port for loading and discharging the cargo from the ship. The shipping line or their agent, in turn, will bill these charges to the shipper/consignee.

Wharfage is also a port charge which is levied by the port directly to the cargo interest for the usage of their facilities and space.

Cartage is the charge for the movement of cargo by road say from the port to the consignee’s warehouse or vice versa.

Chassis Usage Surcharge is the surcharge charged by the line for the usage of the chassis for the above-mentioned cartage and as part of this movement and depending on the weight of the cargo, a tri-axle surcharge (for weights exceeding the road limits) maybe charged

Explanation of Secondary costs

Secondary Charges as Part of Ocean Costs

Emergency Risk Surcharge is a cost that is levied by the shipping line mainly to cover for extra precautions, insurance covers that they need to take to protect themselves from piracy and acts of war especially around the Middle East, West Africa and Malacca Straits areas. This could be a previously notified charge in effect for a few years or maybe imposed suddenly depending upon above activities.

Arbitrary Charge (may also be known as on-carriage) is a cost from the shipping line side for the on-carriage of a container from port of discharge to the place of delivery. This is normally a feeder freight for which the shipping line uses a 3rd party feeder.

Peak Season Surcharge is charged by a shipping line during a specific period within the year when the volumes are at peak, especially between September and November. This is a fixed charge per 20’ or 40’ to cover for the export rush. In addition, this surcharge is a way to alleviate for losses in the first half of the year.

General Rate Increase (GRI) is a charge levied to increase prices during periods of high demand across all or specific trade routes to cover for increased operational costs over a period. This is applied by shipping lines as per their calculations and the quantum of the rate increase is decided by them –  generally based on the supply and demand on that route.

Secondary Charges as Part of Landside Costs

Congestion Surcharge when it is applicable, is a charge levied by the shipping line to cover for delays caused due to congestion at the port of load or discharge. There are certain ports which are highly congested and due to this, the ships must wait at anchor before they are given a berth at the port. Sometimes these delays could run into days which means the ship doesn’t any revenue and therefore this congestion surcharge is levied to compensate for these losses.

VGM surcharge maybe levied by some shipping lines, freight forwarders or shippers themselves as a cost to cover for the administration required for the weighing, monitoring and recording of the VGM information before a container is loaded.

Manifest Correction Fee is a fee levied by a shipping line or their agent when there is a request to amend anything in the shipment details that is already manifested. It is charged to cover the extra administrative work that the agent must do to amend the manifest, prepare the corrector, transmit to the discharge port and ensure that the amendment is acknowledged.

Who charges and who pays

Generally, the ocean cost component is charged by the carrier (including NVOCC) and/or their agent to the BCO or the Freight Forwarder. The landside charges are charged by various entities such as the port (THC, Wharfage), haulier (cartage), customs agent (clearing charges, duty)

Who pays for these charges depend entirely on the terms of the shipment agreed between the buyer and seller. Majority of the buyers and sellers use the Incoterms or International Commercial terms which are a series of pre-defined commercial terms published by the International Chamber of Commerce to decide on what each other’s responsibilities and liabilities are in terms of this trade.

Conclusion

Sounds complicated huh? While there are various factors and components that govern the application and charging of shipping freight costs, it needs not be complicated if both the buyer and seller understand these costs and when it is applicable and who needs to be paid.