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.
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 $USD1,000 + BAFCAF positive 10% gives a total freight rate of $US 1,100.
Suggestion 1: Make sure your rates show CAF and BAF separately to accurately track all changes.
Suggestion 2: Normally all rates are set on a “Freight All Kinds” (FAK) basis, but shipping lines do have other rates for some goods; if in doubt ask the question
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%
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 “Bunkerage Surcharge”, which has been steadily decreasing due to the oil prices have fallen and staying low.
Suggestion 3: The latest increase is a result of Sept 11 and the US involvement in the Afghan war. This surcharge should be withdrawn soon, as it can no longer be justified because of the success of the US in this conflict. If is not it should be a negotiating issue.
Normally BAF is very difficult to negotiate and usually is not worth the effort, unless there are significant worldwide events as mentioned above.
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.
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:
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.
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.
FOB
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.
Ex-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.
