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
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.