- AIR/SEA FREIGHT IMPORT/ EXPORT ELEMENTS
Air and sea freight charges are made up of several elements that will be examined in this paper. Comment will also be made in regard to the anticipated outcomes and recommendations for the best method of negotiating each element with freight suppliers.
This document should be taken as general advice only, for specific assistance you can contact the Canterbury Manufacturers’ Association or an appropriate Service Partner.
- Sea Freight
Normally set by the shipping line or group of shipping lines (called Conference Lines) in US dollars per cubic meter per 1000 kg for Less than a Container Load (LCL) or by Full Container Load rate (FCL). Rates are also in the other major currencies.
This freight cost can include Bunkerage Adjustment Factor (BAF) and Currency Adjustment Factor (CAF) within the rate (and state the fact) or show it separately. Example $USD10,000 + BAFCAF positive 10% gives a total freight rate of $US 11,000.
- Combination of BAF AND CAF Factors
These are minor adjustments (plus or minus) to the established freight rates and are monitored by the various freight conferences and lines against a standard set by them. The adjustments are expressed in percentages and are either positive (surcharge) or negative (rebate). For example BAF = 3.10% positive and CAF =14.7% negative then CABAF = 11.6% negative. This means that the freight rate will be reduced by 11.6%
- Bunker Adjustment Factor (BAF)
This adjustment is applied to cover variations in world oil fuel costs set by the shipping line head offices.
The BAF has been quite high over the last 12 months due to the huge increase in world oil prices. In fact the shipping lines instigated a “Bunker-age Surcharge”, which has been steadily decreasing due to the oil prices having fallen and staying low.
- Your Price Program
Kanha Granites has a large network of mine owners, stockists of specific materials, stone processing plants . If you have a large project and need substantial quantities of our granite products then give quote us your price and we will make it work for you through our network.
Normally payment is through irrevocable letter of credit. However after satisfactory dealings in a couple of shipments, the credit terms can be agreed upon between the customers and Chariot International.
Currently Kanha Granites offers shipments under :
Letter Of Credit – Sight / Credit
Document against payment – COD
Part advance payments 10%- 25% advance and balance against DP/COD.
- Currency Adjustment Factor (CAF)
This adjustment is made to compensate for any significant change in the relative exchange rates in the shipping or conference line basket of currencies between the standard rate set at the time the freight rate was established and the subsequent exchange rate movements.
All currency movements are monitored by the shipping lines from Wall Street on a quarterly basis and changes to CAF are then made accordingly.
CAF is virtually impossible to negotiate. Currently there is no CAF applicable to or from Europe, the USA or the UK. CAF has been levied on the trans-Tasman trade because of the NZ dollar downward push last year to the mid 70s against the AUD. The NZ dollar is now at AUD82/83. This may or may not be a point where the CAF for the trans-Tasman should be reduced; however, the question should be asked.
Normally, BAF and CAF factors are not negotiable as they are set by the shipping lines’ head offices in conjunction with their Wall Street banks.
Shipping lines set the exchange rate per voyage, called the “ship rate” approximately 5 days before the ship sails. This is the exchange rate that should be used when dealing with freight forwarders, so that they cannot make any exchange rates gains when converting your overseas freight charges into $NZD.
If off shore accounts are available to manage exchange risk you can opt to pay all overseas charges from these accounts.
Unless you are a huge importer, the major shipping lines would prefer you to work via a freight forwarder. This should be advantageous to you as the forwarders, because of their total volumes, should be able to secure better rates. However make sure you ask them to show in hard copy the volumes of freight they are actually shipping out of that port and what shipping lines they are using.
- Sea Freight Structures
The amount and type of “add-ons” are directly dependent on the way the goods are purchased as detailed below:
Ex-Works – this means that the seller fulfils his obligation to deliver when he has made the goods available at his premises. The buyer is therefore responsible for:
Insurance and transport to port
Packing into container at port if LCL
Export documentation charges
Origin port fees (handling, loading etc)
Export duties, formalities, taxes etc
Terminal handling/receiving fees (USA only)
FOB (Free On Board) – this means that the seller must pay all costs (as above) relative to the goods until such time as they have passed over the ships rail or entered the loading area of the ship or aircraft at the named port of shipment.
In the USA, FOB can be regarded as “Ex-Works” therefore in this case you need to specify the terms of sale “FOB PORT/AIRPORT”
CIF, C&F – these are “Cost, Insurance & Freight” and “Cost & Freight”. “Cost and Freight” means that the seller must pay all costs necessary to bring the goods to the named port of destination, but the buyer has to bear any loss/damage to the goods, once they are over the vessel’s rail. “Cost Insurance and Freight” means that in addition to the above the seller must provide marine insurance against the buyers risk of loss or damage.
- Import Sea Freight
All inclusive unit price loaded safely on ship.
On inbound you control freight method/type/vendor /timing/ insurance,
Buyer knows the local scene, it may be a large exporter with access to its own transport.
You are not dependent on your forwarder’s strength in the remote market.
Suggestion 4: FOB is likely to be the best option.
Import CIF and C&F under these terms the buyer has no control on who the seller will ship with and when. The buyer may not have any relationship with the shipping line therefore, delays in communication, getting shipping documents etc, failure to meet the buyers needed delivery times can occur.
Suggestion 5: CIF or C&F are generally not recommended.
Suggestion 6: It is prudent to negotiate an “open marine policy” with your insurer for all shipments; you will have better control and reduce costs
Import Ex-Works could be negotiated with all charges to the port of origin but it can be complex and time consuming. It should be remembered that if your overseas vendor is of reasonable size and exports regularly, they should have good deals with transport companies and may be able to create their own export documentation. They should know the local scene, seaports and airports, regulations and requirements and be in a better position to find the best local deal that should be to your advantage.
It should also be noted that in some areas in the world your chosen forwarder may not be strong and therefore their ability to negotiate local charges may be very limited.
However there is a relatively quick method of ensuring you are getting the best deal on origin charges.
- Works vs FOB Costs
Take a typical size shipment that you would be buying from the overseas vendor.
Example: 100 units weighing 1 tonne and measuring 1m3.
Ask your freight forwarder for a broken down but total cost of transporting the consignment from your vendor to over the ship’s rail at the origin port. When you receive it divide it by 100; that is your ex-works to FOB piece price. If a Bill of Lading (BOL) charge is shown this can be negotiated to zero.
Ask your vendor for both an ex-works and FOB piece price. Subtract the ex-works piece price from the FOB piece price, that is the unit cost of transport ex-works to FOB. The two costs can be compared and renegotiated if needed, ultilising the broken down elements of the forwarder’s quote. This is because the vendor may well use a percentage “add-ons “ to give FOB pricing. Check with your vendor what FOB elements have been included.
Suggestion 7: It is important when negotiating an FOB price with a vendor they understand what costs will fall. Also inform your forwarder and the vendor that you will NOT accept and pay for any FOB type charges from that vendor that appear on your freight account.
Suggestion 8: In USA, question closely anyone who quotes terminal handling/receiving charges for US ports. These are generally not valid; do not accept them unless absolutely proven.
- Goods Arrival Charges
Port services charges are set by destination port and are not negotiable, unless for a very high volume importer and even then they are doubtful.
De-vanning of LCL containers is now done by private companies and can be negotiable based on volume of business.
Customs clearance is negotiable based on volume; EDI customs fee of $5-8 transaction can be negotiated to zero. Set charge for custom clearance up to 5-10 lines instead of being charged a base fee then a extra per line charge. You should be able to avoid costs on transfer of documents sent to the transport company’s wharf box for consignment pick up.
Transport charges from the wharf to you are negotiable; if you have the same company for sea and air transport it should be possible to reduce these costs.
Delivery order fee of approximately $NZ25-40 is the fee charged by the shipping company to provide a delivery order after customs clearance so that your transport company is authorized to pick up your goods at wharf. This charge is difficult to negotiate down but it can be done. Shipping lines are very reluctant to reduce this charge.
- Export Sea Freight
As with import sea freight, the export rates are set by the shipping or conference lines by cubic metre/1000kg for LCL shipping or by full container load (FCL). Rates for export are set in NZD only for the trans-Tasman trade. All other rates are set in USD.
CAF and BAF are monitored and applied in the same way as for import. BAF is applicable for all export routes but the only route that CAF is applied is the trans-Tasman trade at this time and should be negotiated or challenged (ref import notes).
CAF and BAF should be shown separately from the freight rate.
Check the applicable freight rate for your goods with your shipping line or forwarder if they are not “general type items” (FAK) e.g. refrigerated needs, food, etc.
Once again, unless you are a huge exporter, the best scenario is to use a freight forwarder, especially if you export numerous LCL shipments
For FCL consignments, insist on using ship’s currency rate struck, if shipping on C&F, CIF, FIS terms, except, of course, for trans-Tasman shipments that are in NZD
- Export Charges
As with import all export charges are directly dependent on the way you sell your goods to an overseas buyer.
Ex-Works: generally the best option for the seller, as he only has to make goods available at his premises, but may have to pack a container or pack goods suitably for export.
FOB: Under FOB export terms the seller is responsible for all charges until the goods are loaded on board the ship or aircraft and must pay and be responsible for:
Packing goods into export pallet or container
Insurance and road transport
Export documentation charge (BOL, export Entry $NZD40)
Freight rate which includes PSC Service charges both for LCL and FCL cargo. (few countries in world do this)
Minimum BOL charge of 1 cubic metre or 1000kg
C&F and CIF: The seller under these terms and conditions is taking on the responsibility to deliver the buyer’s goods to the destination port on time and undamaged. In addition to his FOB responsibilities, the seller needs to find a reliable shipping line or forwarder that can provide a good service, transit time and rate to the buyer’s nominated port, plus be cost effective and reliable (these aspects are very important, in order to keep repeat export business). The shipping line or forwarder also needs to demonstrate that they ship sufficient volumes of freight to the country you are interested in.
Under CIF terms, the buyer will require you to provide marine insurance for the consignment. If you have an ‘Open Marine Policy’ this is easy and costs you nothing, as in essence, you normally pay a set amount per year based on your proven or forecasted shipments.
Ensure that you have accurately and realistically priced your C&F or CIF piece price to your buyer, plus a reasonable margin.
Watch out for unique requirements that each respective country requires for import; for example, Australia, which requires that all shipments packed with wooden packing or pallets have a certificate accompanying them that certifies they are made of fumigated wood. Failure to provide such documentation can lead to the goods having to be fumigated in Australia causing delays and extra cost.
If you are selling on C&F /CIF and especially FIS, it is recommended that you maintain good communication and information flow with your customer.
FIS “Free into Store” means that the seller has the same obligations as CIF but in addition is also now responsible to deliver the goods to the overseas buyer’s premises in a “door to door” scenario. This is a complex and time consuming option and should be avoided by the seller if at all possible. Exporting on a FIS is quite common to Australia, less so to other countries.
- Negotiation Techniques for Export Sea and Airfreight
Approach several freight forwarders and ascertain what their services, transit times and expertise are in the countries your plan to export to, based on your selling terms.
They will need to provide airfreight rates/kilo, plus broken down costs of all FOB/CIF/FIS type charges, which need to be compared and negotiated.
All export documentation charges are negotiable.
The Flat FOB charge approach for export airfreight is not suitable.
Minimum BOL charges for LCL shipments should be able to be reduced from 1m3 to 0.5 m3.
All FIS type charges need to be supplied, broken down, verified and compared and negotiated based on “best price “ scenario
- Payment Terms for Air & Sea Freight- Import/Export
If you are dealing directly with shipping companies the best payment terms possible are 7-14 days after ship has sailed.
Make use of offshore accounts to pay overseas charges.
If you are dealing with a freight forwarder and you have a reasonable level of business, then you can negotiate 20th month following terms. If you can consolidate all your freight business with one vendor for sea and one for air, this will strengthen your case for 20th of month terms.
- F.O.B. FREE ON BOARD (…NAMED PORT OF SHIPMENT)
FOB means that the seller of the goods must load the goods onto the container, deliver the container to the port and load it on a vessel. In case of break bulk cargo it has to be loaded on board the vessel. The buyer on the other hand takes possession of the goods when they pass over the ship’s, rail at the named port of shipment. The buyer is therefore responsible for all costs and risk of loss of or damage to the cargo from that point. Under the FOB terms, the seller must clear the goods for export. Despite the fact that FOB term should only be used for sea or inland waterway transport, it is used for all kinds of transport in the everyday conversations among traders.
Under the FOB contract, the seller has no obligation for the freight cost or insurance cost, this is the responsibility of the buyer. When shipping commodities, the FOB term can be profitable for the buyer if the buyer is chartering a vessel. Usually a good freight rate can be negotiated providing the buyer is a frequent customer in the freight market. In shipping commodities, a saving of $1 to $3 per metric ton by the chartered party (a company chartering the vessel) can result in substantial additional revenue. On a 20,000 MT shipment this difference translates into $20,000-$60,000 profit. There are potential risks associated with chartering a vessel, such a demurrage. Nevertheless, there are ways to limit those risks to a minimum and still bear the advantages.
FOB Stowed or FOB ST. (Short for Stowed) term may often be seen in a commodity contract. Stowed or ST. means that the seller is responsible for stowing the goods loaded on board the vessel inside a vessels hall. Furthermore in addition to FOB Stowed the contract may mention FOB ST L/S/D. The term L/S/D stands for Lashing/Securing/Dunneging. In this case the Seller is also responsible and has to pay for L/S/D.