How to Calculate Ocean Freight Charges?
Transportation by sea is the most common method of moving bulk as well as Less-than Container Load (LCL) shipments between locations, especially in international trade. Typically, ocean freight invoices are issued by shipping lines to their customers for transporting cargo. It may also be issued by an agent on behalf of the shipping company.
Besides the ocean freight charges, an ocean freight invoice would usually include all other related costs such as goods collection charges, cost of road or rail transport, and the various other charges connected with transporting goods by sea.
Especially when a shipment is multi-modal and the agreement is door-to-door, it would include charges for collection and transport, labour charges for handling the goods, and any other charges that are incurred during the course of its movement from the customer’s premises to the port of origin. It may also include charges incurred after the container is discharged from the vessel till it reaches its final destination.
Some common charges found in a freight quotation are Terminal Handling Charges (THC), Inland transport and handling charges, Bunker Adjustment Factor (BAF), Currency Adjustment Factor (CAF), Bill of Lading fees, etc.
Ocean Freight and Incoterms®
It is not always necessary for a freight quotation or freight invoice to include such related charges. It would to a large extent depend on the Incoterms® agreed between the seller and buyer. A door-to-door transport agreement between buyer and seller would include all the above charges.
Incoterms® are trading terms published by the International Chamber of Commerce (ICC), meant to ease communication among global trading parties and to fix the responsibilities of each of them – the seller, the transport agent, and the buyer. It is therefore recognized by all global trading bodies, the government, and the law.
Freight companies normally deal with the seller of the goods or the party that books the transport of a consignment. It is from them that they get all the booking and shipping instructions. The ocean freight payment is also arranged by them. But there are also instances when the freight company is paid ocean freight charges by the buyer or the party that receives the goods.
In a different scenario, a company that books a consignment by sea freight may pay the freight company charges related to transporting the goods to the port, repacking – if required, inspection and customs charges, Terminal Handling Charges (THC), documentation charges, or any other dues incurred until the cargo is put on board the vessel. Ocean freight charges may be paid by the company that receives the cargo. It would also bear the cost of inland transport and other charges at the destination port.
A contract of sale must therefore state clearly all the terms and conditions of the sale using the correct Incoterms®.
Ocean Freight Base Rates
Freight and shipping companies have base rates that are used in the calculation of ocean freight charges. Typically, the ocean freight charge for a Full Container Load (FCL) of cargo will be based on the size of the container, that is, 20’ or 40’ or 45’, and its type – refrigerated, non-refrigerated, etc.
An LCL consignment will be charged according to its weight or volume, whichever is higher. The weight in tons or volume in cubic meters (CBM) is multiplied by an LCL base rate that is charged by the freight company. CBM is the volume of an object that is 1 meter in width, 1 meter in length, and 1 meter in height.
Also known as the volumetric weight, it is the space taken up by the packed cargo inside a container or on the transport. LCL ocean freight charges are based on the gross dimensions or weight. This is the total dimensions or weight of the consignment including its packing, palletization, etc.
In the case of LCL cargoes, when the weight of cargo exceeds 1000 kilograms (1 ton), then the exact weight is used to calculate freight charges.
The reason why ocean freight is charged either by weight or its dimensions is because of the proverbial ‘kilogram of iron and kilogram of cotton’ difference.
As we know, packed goods need not always be of regular shapes. They may sometimes be cylindrical or of other abnormal shapes. The freight charges of such irregularly shaped cargo are calculated in different ways.
The method of arriving at volumetric weight varies between road, ocean, and air modes of transport. It may vary between different countries or freight operators may have their own method of calculating this. However, the generally accepted factors are as follows:
Road freight : 1 CBM equals 3000 kilograms (3 tons)
Ocean freight : 1 CBM equals 1000 kilograms (1 ton)
Freight by air : 1 CBM equals 6000 kilograms (6 tons)
Based on the above, a freight operator will charge his customer for LCL shipments either by gross weight or volumetric weight, whichever is higher. This is called the chargeable weight.
Let us take an example here of how the ocean freight charge is calculated for an LCL shipment.
Cargo dimensions : 5 m X 5 m X 5 m
CBM : 125 m³
Gross cargo weight : 300 kilograms (0.3 ton)
Freight rate : USD 60 per CBM or ton
Freight charged : 125 m³ X USD 60 = USD 7500
The CBM factor used for ocean freight is 1 CBM = 1 ton. In this example, the actual ton weight is less than the volumetric weight (CBM) and hence, the ocean freight charges are calculated based on the CBM.
A table showing the general dimensions and volumes accommodated by the different types and sizes of containers is given below:
Related Reading – TEU in Shipping: Everything You Wanted to Know
This brings us to the question of how many CBMs does a normal pallet hold? While the exact CBM will depend on the height to which a pallet is stacked, generally the CBM of a pallet is taken as 1 m X 1 m X 1 m = 1 CBM.
Most cargo carriers and freight operators have aligned together for their common benefit, these days. Known as shipping alliances, it helps operators to cover and share the global shipping routes as well as stabilize ocean freight rates.
Shipping alliances are helpful to customers as well as they can find better routes and therefore reduce transit times. Customers may sometimes benefit from better rates offered by the members of such shipping alliances.
You might also like to read:
- What is an Intermodal Container?
- What are FCA Incoterms® in Shipping?
- What Is CBM Rate In Shipping?
- Who is a “Multimodal Transport Operator”?
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Hari Menon is a Freelance writer with close to 20 years of professional experience in Logistics, Warehousing, Supply chain, and Contracts administration. An avid fitness freak, and bibliophile, he loves travelling too.