[INFOGRAPHIC] Charter party: how to optimize maritime transport costs?

The charter party must be elaborated according to the conditions of the maritime transport that will be carried out: size of the containers, type of cargo, seasonality of the market, and the operational routines on the destination port are some of them.

Like any international commercial operation, its biggest challenge is tying up the various aspects which make up an operation of this magnitude. The main ones will be discussed in the next topics. Stay tuned!

What kinds of charter parties are there?

From the exporter’s perspective, there are two types of deal. The first one is more common when you have a fixture (closing deal of a contract) of the spot punctual type — not regular — or when the charterer prefers to close its cargo by making the most out of the market’s moment, according to each case. Therefore, he or she closes a deal for one voyage only.

Another modality is a long-term chartering contract, known by the incoterm Contract of Affreightment (COA). In this scenario, the charterer works with an estimate of cargo throughout a longer period or considering the market’s heating up. Therefore, it’s preferable to anticipate the closing of the deal, avoiding a future price increase.

How is a quotation for maritime transport made?

A shipping quotation is made considering the daily cost of the ship hired and the time necessary for unloading cargo and for customs clearance at the source and destination ports. To that cost are added fees for port entrance, cost with fuel, and the amount paid to agents and their respective commissions, if that’s part of the deal.

There is also a cost per tonne, which is calculated by dividing the total space available by the amount of cargo. When there is cargo from different charterers on the ship, a pro rata percentage is calculated.

However, you also need to consider other factors which might influence when calculating the weight of the cargo being transported. The most common ones will be explained briefly now.

General Cargo

Depending on the conditions available for chartering, the exporting company may opt for fractionating the cargo so as to clearly evaluate the division of space. Therefore, it’s possible to know exactly how many containers are needed for transportation, which might mean a lower cost. Taking this into consideration, opting for General Cargo might be advantageous.

Opting for fractionating the cargo can be done in two ways: unitized cargo, where each item represents a unit, or unpacked cargo. In this case, sacks, cardboard boxes, and other recipients can be used to determine the space occupied by each unit.

FCL

When a Full Container Load (FCL) price is set, the charterer pays for the totality of the space available in each container, even when not all of it will be used. Therefore, this type of quotation is more commonly used when the charterer knows for sure that the cargo will occupy the entirety of the recipient.

LCL

When you don’t expect the cargo to occupy entire containers, it’s recommended that you opt for a Less Container Load (LCL) price. If thus accorded, your cargo will share a space with items from other charterers.

This means economy, since you will only pay for the space actually used to transport your cargo. An apportionment is done between the charterers, who then divide the cost of the operation according to the contract.

Refrigerated Freight Load

As the term already makes clear, a Refrigerated Freight Load price is set when the cargo to be exported or imported needs to be maintained in low temperatures. This includes fish, meat, fruit, juice, vegetables, and other items which need to stay refrigerated in other to maintain their properties.

Bulk Cargo

Bulk Cargo is one of the most demanding types of transportation in terms of operational capacity. In this type of transportation, the cargo — dry or liquid — is not conditioned, that is, it will be transported in fully loaded containers from the source to the destination port.

There is no dividing in smaller units, and the measuring of the cargo is done according to the type of container being used. Therefore, Bulk Cargo transportation is especially recommended to transport grain, petroleum, and other agricultural and mineral genres in bulk.

Neobulk

Usually transported in Ro-Ro ships — Roll On/Roll Off —, “or other specialized vessels such as celulose carriers”. Neobulk cargo is not always conditioned by the unit. Since its loading and unloading is always done by auxiliary vehicles or by wheeled platforms, this type of cargo is transported in batches, similar to how it happens on vehicle transport.

Hazardous Cargo

To set a price for transporting Hazardous Cargo, the charterer needs to consult the United Nations’ classification for this type of cargo. In order to do so, he or she needs to act according to the UN Recommendations on the Transport of Dangerous Goods, whose procedures are set on the IMDG Code — the International Maritime Dangerous Goods Code.

The category of Hazardous Cargo includes liquid and solid flammables, explosives, infectious materials, and others listed on the code.

What are the ship’s daily operating costs?

In order to correctly measure sea freight shipping operating costs, it’s necessary to also evaluate the conditions and the routines of the ports involved.

An example is when the charter party predicts Refrigerated Freight Load transportation. There are ports which are already equipped to receive this type of cargo, while others rarely do so. If that’s the case, the total cost is expected to be higher.

Something similar happens when the shipowner does not have the necessary apparatus to conclude the unloading process, which might also mean an extra cost, since the importer will be responsible for the operation.

When and how is it possible to optimize cost?

Cost optimization depends not only on the type of cargo being loaded, but also on the responsibilities taken on by each side when the deal is closed.

Therefore, the charterer needs to consider the 3 main modalities:

1. Free on Board (FOB)

The exporter is responsible for delivering the cargo, unencumbered, aboard the ship indicated by the importer on the source port.

In a FOB contract, the exporter is responsible for all expenses up until the moment the cargo is loaded on the ship. When the items are unloaded from the vessel, the expenses and the risks of losing or damaging the cargo are up to the importer.

2. Cost and Freight (CFR)

The exporter must deliver the cargo at the destination port chosen by the importer. Here, the transportation costs are up to the exporter. Any expenses related to insurance and unloading the cargo are therefore covered by the importer.

By signing on to this modality, the exporter assumes the obligation of clearing the cargo for export and of using only maritime transport or through inland waterways.

3. Cost, Insurance and Freight (CIF)

The difference between the CIF and the CFR modalities is that, on the former, the exporter is responsible for paying the insurance fees.

There are certainly other factors to be considered; after all, a charter party needs to contemplate a series of requirements and to follow procedures that demand other costs. Anyway, paying attention to the considerations listed here already guarantees more competitive prices and, on the international commerce sector, any difference, no matter how small it is, is welcome.

If you have any doubts or if you would like to add something, leave a comment below and we’ll be thrilled to answer it. Help amplify the debate!