How freight rates are calculated.

  • How freight rates are calculated.

    Daks Couriers Limited has been in the couriers business for over 16 years now. Here are a few tips on freight.
    Freight rates are simply the price at which a certain cargo is delivered from one point to another. Traditionally thats where the simplicity ends, as the calculations involved in producing these prices can depend on the mode of transport (road freight, air freight or sea freight), the nature and form of the cargo (Loose cargo, containerised cargo etc) the weight or volume of the cargo, and the distance to the delivery destination.

    However to give you an idea of how shipping freight rates are built up and calculated, we have put together a guide explaining shipping freight rates across the different modes. We will also cover Air freight rates, road freight rates and courier rates in future articles, but will begin with sea freight services.

    Sea Freight Rates
    The two main elements to the cost of transporting goods by sea are:
    • The sea freight charges set by the carrier,
    • Costs associated with handling and clearing the goods at the ports of loading and discharge.
    Another factor that affects the cost of containerised sea freight, is whether the goods require a dedicated full container (FCL) or can be consolidated with other cargo (LCL). Lets break down both below.

    FCL (Full Container Load)
    FCL is the abbreviation for a “Full Container Load“. And the term is pretty self explanatory. The shipping line charges a flat fee per 20′ container, 40′ container or 40′ High cube container, and the amount is dependent on many factors including origin, destination, volume, time of year, plus many other variables. Unless you have a contract with the shipping line or are moving significant volume, you will usually get a more favorable deal from a freight forwarder, who will likely have access (directly or indirectly) to a discounted rate based on certain volume agreements.

    LCL (Less than Container Load)
    When you do not have enough cargo to fill a shipping container (also known as groupage shipping)
    , LCL is usually a very viable option. Specialist LCL sea freight consolidators run services to all of the major ports and gateways around the world. They do this by paying for a full container from the shipping line, consolidating multiple smaller shipments at their warehouse, loading and shipping the full container in the usual manner and then earning their profit by charging a pro rata rate per 1000 kgs or 1 Cubic Meter (whichever is greater), known as weight or measure (w/m)

    FCL or LCL ?
    There are some instances where a shipper will not want to share a container even if LCL is cheaper, but for most the decision of which option to choose comes down to cost.
    Consider the below example when shipping from London to Durban, South Africa (fictional rates !) Lets say shipment size of 2000 kgs and 10.000 M3
    20 ‘ container would cost £2500 including all costs from collected to arrival port.
    LCL rate would be £95 w/m (per 1000 kgs or 1.000 m3) from collected to arrival port.
    This leaves the following options
    • Pay £2500 if shipping as full container load (FCL), or
    • Pay £950 if shipping as less than container load (LCL)

    How to calculate freight rates ?
    Sea Freight rates are normally provided in the form of a Freight quotation, and the format of these quotations can vary from freight forwarder to freight forwarder and sea freight company to sea freight company. Whilst new surcharges seem to be introduced daily, your sea freight price will most likely be made up of the below freight & surcharge items.

    Name Description FCL Charge Type LCL Charge Type
    Inland Haulage Haulage from shipper to export warehouse or port of exit. Lump SumCan include OR be subject to Fuel surcharge Lump SumCan include OR be subject to Fuel surcharge
    THC Terminal handling charge – container handling at the port or consolidation warehouse Lump Sum Weight or Measure (W/M) Usually based on per 1000 kgs or 1.000 M3 whichever the greater.
    Documentation Admin charge for required shipping documentation. Lump SumCan be multiple items for different documentation. I.e. Shipping line Bill of lading / House Bill of lading / certificates of originetc. Lump SumCan be multiple items for different documentation. I.e. Shipping line Bill of lading / House Bill of lading / certificates of originetc.
    Customs Clearance Production and lodging of customs declaration. Lump Sum Lump Sum
    Security Surcharge for additional security measures usually imposed by the port. Lump Sum Lump sum
    Ocean freight Base rate for ocean freight. Lump Sum Rates sold per size unit. I.e. 20′ cntr = $1000 40′ cntr = $2000 Weight or Measure (W/M) Usually based on per 1000 kgs or 1.000 M3 whichever the greater.
    BAF Bunker adjustment factor – fuel surcharge for the ocean transport Lump Sum Rates charged per size unit. I.e. 20′ cntr = $350 40′ cntr = $700 Weight or Measure (W/M) Usually based on per 1000 kgs or 1.000 M3 whichever the greater.
    CAF Currency adjustment factor – hedging of currency exchange risk Percentage of Freight Normally advised as percentage of freight rate. I.e. 20′ cntr = $1000 CAF @ 12% = $120 Usually a percentage of the freight or sometimes W/M. This really comes down to how the freight forwarder choose to present it, often it will be shown as ‘inclusive’

    There may be additional charges depending on where you are shipping to, but the above are the core freight rate components when shipping under CFR incoterms. Some freight forwarders will charge for providing sea freight tracking services, but most now offer this as standard, unless some bespoke form of sea freight tracking is required and they need to incorporate something outside of their internal systems.

    Some sea freight forwarders or the consolidators themselves will incorporate some or all of these charges into the Ocean freight rates to simplify the calculation. Nothing wrong with this, but just ensure you are comparing ‘apples with apples’.

    For example if you requested a rate for a shipment of 4 pallets at 1000 kgs and 4.000 M3 from London to Hong Kong.

    Asking two different forwarders it’s quite likely you could receive rates as different as below.

    Charges Forwarder A Forwarder B
    Haulage INC £50
    THC INC £5 W/M
    Documentation INC £10
    Security INC £5
    Customs INC £15
    Ocean Freight $100.00 W/M $30.00 W/M
    BAF INC INC
    CAF INC INC

    At first glance it’s very difficult to tell which option is cheaper. Option A is easy to understand and works out to $400. But it’s only by calculating all the charges in Option B that we see that they the cheapest option at £175 v £240 (approx)

    Not to say there is anything wrong with either of the above methods of pricing, just highlighting that the shipper needs to be aware of the total cost for all charges before making a comparison.

    There has been some development recently in creating a sea freight calculator solution to make this sea freight rates comparison easier, and this is a subject we at Freight Filter are putting a huge amount of resource into creating and perfecting.

    The Open to Export article on using price comparison websites to find the best freight forwardergives further information about this recent development.

    Destination charges
    The above guide has been written from the point of view of exporting from the UK and under CFRincoterms. You can read Open to Export’s explanation of what Incoterms are for more information.

    This means that consignments are usually shipped from ‘Door to port’ and charges not included in the prepaid freight amounts will be for the account of the buyer/consignee i.e. Destination THC, Destination documentation, Destination customs clearance and any delivery to the consignees door.

    In some instances these can be included in a international sea freight shipping price, but will usually be noted with a clear caveat i.e. ‘Quotation based on collected London to arrival New York port – including destination THC’

    Hope this has cleared up some questions surrounding sea freight pricing and will get to work on doing a similar guide for the other modes of transport, starting next with an Air Freight Rates Guide.

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