Container shipping companies' conditions of sale are becoming increasingly personalised, a process favoured by digitalisation.
In August 2020, Upply took you into container shipping's backroom in an article explaining shipping companies' general conditions of sale. Since then, the container sector has gone through a period of unprecedented rate increases, recomposition of the logistics chain and vertical integration.
Have these changes resulted in major changes in shipping companies' conditions of sale on the world's main trade routes? Upply put this question to the market with the aim of providing operators with some ideas which will be useful to them when they come to analyse their international sales contracts.
NB : In this article, we refer to "liner terms" for full container loads (FCLs). We will look at groupage (LCL- Less than container load) at a later date.
1/ Shippers' interests taken better into account
We are seeing a steady erosion of the liner terms imposed by the shipping companies as a contractual obligation in transport contracts. This is a fundamental trend, which represents a significant gain for shippers. Shipping companies' sales are becoming increasingly digitalised, and this is making it possible to personalise the different components they use to calculate their rates in addition to the cost of sea transport proper.
All the major shipping companies are now able to programme their IT systems to share out ad hoc charges between the contracting parties, in line with clients' wishes and according to the applicable incoterms and type of traffic involved. These arrangements are included in the sales and operations planning (SOP) proper to each client.
As regards rate construction, the basic FIFO (free in/free out) approach, which is to say the cost of transport alone, including basic surcharges like the bunker adjustment factor (BAF), has become the basic unit of measurement for the shipping companies. To this there needs to be added terminal handling charges (THC) at the port of departure and/or arrival and other charges (mainly for pre- and post-routing under carrier haulage agreements).
By way of a reminder, a "pure" FIFO freight rate is the rate paid for the carriage of a container, from the time it is aboard ship, stowed and lashed, at the port of departure, to the port of arrival, without unlashing or unloading. Any intermediate transhipments are taken into account by this rate, provided that it is not a direct port-port voyage carried out by one and the same ship.Advantages for the shipping companies
- Greater commercial flexibility, allowing the company to draw up an infinite number of tailor-made offers.
- Better control of billing and fewer disputes because the SOP is normally pre-validated by the contracting parties.
- Better guarantees that end-clients are not double-billed for certain additional services by forwarders.
- It is difficult to make new all-in offers once the rate composition process has been revealed. This transparency can be difficult to manage when companies are trying to increase their market share.
- On markets with very low freight rates, it is mathematically possible to come up with negative freight rates (this has already happened), which poses problems of legal compliance problems, as well as direct financial ones.
- The transport contract can be adapted to fit the commercial contract rather than the opposite, which we can take to be a legitimate improvement and one which is in the client's interest.
- Increased transparency in terms of "who pays what" according to the terms of both the commercial contract and the transport contract. This is very important at a time when detention and demurrage costs are soaring in loading and unloading ports and are an inherent source of dispute and legal action between the parties.
The pressure exerted by digitalisation and shippers has, therefore, left us with a new framework for the construction of FIFO rates, which can now be seen in the way that quotations are presented to clients. A breakdown of costs has virtually become a right for shippers. The vast majority of parties involved in traffic from Asia and more generally, in the intra-Asia and Indo-Pacific zone approach their rates in this way, which offers maximum flexibility.
2/ Old habits persist
Be careful, however! Some older practices are still in use on the shipping company side. This is particularly the case for Gate In/Free Out (GIFO) rates, which include terminal handling charges (THC) at loading ports, and Gate In/Gate Out (GIGO) rates, which include THCs at the ports of departure (THC L - in which the "L" standing for loading) and at ports of destination (THC D - in which the D stands for discharge).
Following close study, we realised that most shipping companies continue to offer GIFO rates in certain, mainly ex-Europe trades, and even GIGO rates to the United States.
The zones in which GIFO terms are generally offered by the shipping companies to their European clients, who mainly use C category Incoterms for sales purposes, are:
- Europe to Asia: departing from both the North Continent and the Mediterranean.
In this trade, "better than empty" is the prevailing logic. Once THCs have been deducted, ocean freight rates offer skimpy returns and are sometimes negative, but the shipping companies' priority is to reposition their boxes on the dominant Asia-Europe leg, even if this trade is currently going through a difficult period.
- Europe to West Africa, departing both from the North Continent and the Mediterranean.
- Europe to South Africa, departing both from the North Continent and the Mediterranean.
- Europe to Mexico and South America, departing both from the North Continent and the Mediterranean.
- United States to Europe
It should be noted that in the above-mentioned trades, even if GIFO rates are mostly offered in response to first requests for quotations, it is increasingly possible for clients to put together an ad hoc SOP with their chosen carrier.
3/ American exception
It is no secret to anyone that the Americans are opposed to International Chamber of Commerce incoterms in whatever form the come. They have their own interpretation of incoterms under their own federal law and, in this way, do all they can to protect their domestic transport market, through the use of national brokers. This runs counter to practice in the rest of the world and is likely to pose an increasing number of problems in future, particularly if the United States claims worldwide trade leadership again in the long term.
In most American states, FOB sales through an American port of departure mean that the buyer has to pay the cost of inland transport in the United States, which is provided by a transporter chosen by the expeditor. In other words, buyers have no say in the choice of transporter or in the price they will have to pay for inland transport in the United States.The liner terms in use in the United States
Access to the American and Canadian markets is regulated. The breakdown of costs must follow a format laid down by the Federal Maritime Commission. Ad hoc contracts must be registered and accepted by the FMC before the goods concerned are loaded.
- Gate in / Gate out
This is why, for first requests for quotations for goods leaving Europe for the United States and Canada, we find GIGO-type freight rates, including THCs at the ports of arrival and destination, or CY/CY rates, which cover transport from the container yard of departure to the container yard of destination. Careful, though. Documents should specify the exact location of the container yard concerned, since this is not necessarily the port terminal of departure or destination, whereas GIGO rates refer exclusively to the port terminal of departure and destination used by the ship.
- Gate in / Free out
Under the pressure of their European clients and to avoid European exporters being blamed for container storage problems in American ports, a radical new trend has been seen since the start of the pandemic, which has seen GIGO contracts turned into GIFO contracts to ensure that expeditors do not bear financial responsibility for anything that happens to goods sold on the basis of Category C Incoterms, which are the ones mainly used in the transatlantic westbound trade, while they are in American terminals.
The other liner terms which continue to be used for transport contracts for goods being sent from Europe to the United States are "ramp" terms, the best example of which is Chicago. In this case, the shipping company delivers the cargo to the Chicago rail terminal rather than the port of arrival in the US. The cost of rail transport from the US east coast port to the exit point at the Chicago rail terminal is included in the ocean freight rate.
- "Final destination"
The other liner term which can be found in the US is "final destination". This refers to a rate which takes account of all costs from the reception of the goods by the shipping company to their agreed final destination (for example, "Le Havre/Denver within city limits".
This liner terms makes sense for sales based on Category D incoterms, which is often the case in the European pharmaceuticals and chemicals sectors. In practice, however, it is increasingly difficult for shipping companies to offer these conditions for goods coming from Europe, since local brokers in the US ports control this kind of freight and set their own terms.
- Overall, shipping companies' liner terms are in decline but not yet extinct! They are a relic of the shipping conference era, which existed until 2008 in some cases, but are gradually disappearing over the planet as a whole, as relations between shipping companies and their customers are increasingly customised, thanks to the greater flexibility made possible by digitalisation.
- Faced with this global trend the United States is resisting. For this reason, it is easier to understand why certain shipping companies are establishing themselves directly in American terminals in an attempt to position themselves on local inland transport markets.