FREE ESSAY ON SHIPPING RATES

SHIPPING RATES

THE THEORY OF FREIGHT RATES An amazing assortment of goods are moved over the worlds
ocean
trade routes. Of necessity, the carriers charge for the service they render. These
charges vary almost as widely
as do the cargoes, for they mirror both the shipowner's costs and the special conditions
prevailing on the trade
routes traversed by the ships. Ocean freight rates may be described as the prices charged
for the services of
water carriers. Each ship operator develops it's own rates, usually without consultation
with the shippers. The
charges reflect the cost of providing the carriage, the value of this service to the
owner of the goods, the ability of
the merchandise to support the expense of transportation, and economic conditions in
general. Freight rates truly
reflect the working of the laws of supply and demand. In tramp shipping, particularly, it
is possible to observe
how these factors influence the rise or fall of freight rates from day to day and from
cargo to cargo. Tramp ships
transport, in shipload (or full cargo) lots, commodities which, like coal, grain, ore,
and phosphate rock, can be
moved in bulk. The fact that usually only one shipper and one commodity are involved
simplifies the
establishment of a freight rate for this particular movement. To the capital charges of
ownership and the expense
of administration and overhead must be added the cost of running the ship, handling the
cargo, and paying port
fees and harbor dues. Against this total is set the number of tons to be hauled, and the
resultant figure is what the
tramp must charge, per ton of cargo loaded, to break even on the contemplated voyage. If
competitive
conditions permit, a margin for profit will form part of the quoted rate. If however the
prevailing economic
climate is unfavorable, the owner has the privilege of retiring the ship to a quit
backwater, there to wait until the
financial skies are brighter. The tramp operator does not depend upon the longterm
goodwill of the shippers, but
is free to accept those offers which appear profitable at the moment. When adversity
threatens, those charters
are accepted which minimize anticipated losses. If there is a choice, the cost of
temporary lay-up is contrasted
with the loss which continued operation might produce, and the less expensive alternative
is selected in a bow to
the inevitable made with whatever grace that can be mustered. Liner-service companies, on
the other hand,
depend for financial prosperity upon the accumulated goodwill of shippers who, through
the years, come to rely
upon the regular and continued operation of the company's fleet. Temporary withdrawal
from service whenever
economic conditions are less than favorable is unthinkable. The liner will sail on her
regular run, whether full or
not, she will carry a wide variety of commodities, each with its own peculiarities, in
quantities which can be
estimated in advance more or less accurately, but never with complete certainty. The
ports of call are known far
in advance of sailing, and the total expense of working the ship can be calculated with
acceptable precision.
Since, however, the exact distribution of tonnage, commodity by commodity, varies with
every trip, it is not
possible to establish a rate that reflects the cost of transporting a single ton of a
particular commodity as closely
as does a tramp owner's computation. This is not to suggest that liner-service operators
cannot compute to a
nicety the costs of owning and operating their ships. They know to a fraction of a cent
their daily costs for
amortization and interest on borrowed capital, and what administrative expenses they must
charge to individual
voyages. In the same manner that their counterparts in the tramping trade are able to fix
individual rates, liner
owners can determine what they should charge per-ton to carry a single commodity when it
is offered in lots
sufficient to fill one of their ships. From experience, the liner- service operators know
approximately what is
going to move, voyage after voyage, and have a good idea of what tonnage to expect. They
must estimate the
overhead to be charged against each commodity and the out of pocket costs of handling
them at ports of loading
and discharge. An apportionment of revenue must be made to defray the administrative
expense of the vessel
operation. Finally, a small profit should be added to compensate the owners for the risks
they assume as well as
for their skill and enterprise, for providing transportation they enhance the value of
the goods. They are justified
in assigning a reasonable value to this real, albeit intangible, contribution. Underlying
these general principles are
certain factors which influence, in one way or another, the establishment of freight
rates for individual
commodities moving in liner-service vessels. The first of these factors is that freight
rates should be reasonable to
shipper and to the carrier. The shippers must be satisfied that the money they pay for
transportation will not drive
the price of their goods above the competitive level of the markets where they trade. If
the exporters or
importers are trying to compete with goods from sources closer at hand, they will
consider that the cost of
transportation, no matter how low, is nothing less than a barrier to trade. In
determining what is reasonable as a
charge for transportation, the shipper's complete indifference to the financial condition
of the carrier must be
remembered. The sales appeal of a given article is often set by the price which includes
the expense of
transportation. Should the margin between the seller's total costs and the market price
be too narrow to leave
profit, the seller attempts to convince the carrier to reduce the prevailing freight
rates. The argument always is, if
you don't come down, you will lose all my business. If you will help me to keep my price
at the competitive level,
you will benefit by my continued patronage. After all, your ship is going to sail on this
route anyhow, so why not
make this concession? The second factor, which influences the establishment of freight
rates, is competition. If a
carrier sets rates higher than those of its rivals, patrons may be lost to shipowners
whose services are available at
lower prices. If, however, a figure is quoted which nets no profit, the outreach may be
too successful, and the
carrier may be overwhelmed by the volume in which this commodity is offered. Whereas a
few tons could be
handled on each voyage, this nonprofit item cannot be allowed to crowed out other
commodities on which the
rate is remunative. Another type of competition is the rivalry between ports. In their
never-ending search for
cargoes to move through their facilities, the various ports of an area stress their
modern piers and wharves, their
intraport systems of roadways and railroads, and the frequency of sailings to all parts
of the world. Ports also
advertise their location with reference to major overseas destinations, as well as the
excellent rail and highway
networks feeding the port. The ideal of the ocean carrier is to foster international
trade and to build up the
tonnage of cargo carried by the proprietary vessels. Although more attention may appear
to be given to the large
scale shippers of goods, the small businessman actually is not ignored because the rates
quoted by liner
companies are the same for all shippers, regardless of the quantity of cargo offered. In
practice, the small-scale
shippers, benefits from the ability of the large scale shipper to demand more favorable
treatment. A demand
which can be supported by the threat to transfer business to a competitor. 
Bibliography
BIBLIOGRAPHY Buckley, James J.
/ Kendall, Lane C. THE BUSINESS OF SHIPPING 6th ed. Copyright 1973,1994 by Cornell
Maritime
Press, Inc. Bowditch, Nathaniel D. BOWDITCH THE AMERICAN PRACTICAL NAVIGATOR 5th ed.
Copyright 1995 by the Defense Mapping Agency Hydrographic/Topographic center, Bethesda
Maryland.
Maloney, Elbert S. DUTTON'S NAVIGATION AND PILOTTING 14th ed. Copyright 1985 by Naval
Institute Press, Annapolis Marland.