AIR/SEA FREIGHT
IMPORT/ EXPORT ELEMENTS AND
NEGOTIATION TECHNIQUES
General
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.
1.1 Sea Freight
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
1.2 Combination of BAF AND CAF Factors
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%
2.0 Bunker Adjustment Factor (BAF)
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withdrawn soon, as it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.
3.0 Currency Adjustment Factor (CAF)
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.
4.0 Sea Freight Structures
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:
Insurance
and
transport to
port
Packing into
container at
port if LCL
Export
documentation
charges
Origin port
fees
(handling,
loading etc)
Export
duties,
formalities,
taxes etc
Terminal
handling/receiving
fees (USA
only)
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.
In the USA, FOB can be
regarded as “Ex-Works”
therefore in this case
you need to specify the
terms of sale “FOB
PORT/AIRPORT”
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.
5.0 Import
Sea
Freight
FOB
All
inclusive
unit
price
loaded
safely
on
ship.
On
inbound
you
control
freight
method/type/vendor
/timing/
insurance,
Buyer
knows
the
local
scene,
it
may
be a
large
exporter
with
access
to
its
own
transport.
You
are
not
dependent
on
your
forwarder’s
strength
in
the
remote
market.
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-Workscould 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.
t 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.
IHowever 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.
Ask your freight forwarder for a broken down but total cost of transporting the consignment from your vendor to over the ship’s rail at the origin port. When you receive it divide it by 100; that is your ex-works to FOB piece price. If a Bill of Lading (BOL) charge is shown this can be negotiated to zero.
Ask your vendor for both an ex-works and FOB piece price. Subtract the ex-works piece price from the FOB piece price, that is the unit cost of transport ex-works to FOB. The two costs can be compared and renegotiated if needed, ultilising the broken down elements of the forwarder’s quote. This is because the vendor may well use a percentage “add-ons “ to give FOB pricing. Check with your vendor what FOB elements have been included.
Suggestion 7: It is important when negotiating an FOB price with a vendor they understand what costs will fall. Also inform your forwarder and the vendor that you will NOT accept and pay for any FOB type charges from that vendor that appear on your freight account.
Suggestion 8: In USA, question closely anyone who quotes terminal handling/receiving charges for US ports. These are generally not valid; do not accept them unless absolutely proven.
6.0 Goods Arrival Charges
Port
services
charges
set by
destination
port,
not
negotiable,
unless
very
high
volume
importer,
even
then
they are
doubtful.
De-vanning of LCL containers, now done by private companies and can be negotiable based on volume of business.
Customs clearance is negotiable based on volume; EDI customs fee of $5-8 transaction can be negotiated to zero. Set charge for custom clearance up to 5-10 lines instead of being charged a base fee then a extra per line charge. You should be able to avoid costs on transfer of documents sent to the transport company’s wharf box for consignment pick up.
Transport charges from the wharf to you are negotiable; if you have the same company for sea and air transport it should be possible to reduce these costs.
Delivery order fee of approximately $NZ25-40 is the fee charged by the shipping company to provide a delivery order after customs clearance so that your transport company is authorized to pick up your goods at wharf. This charge is difficult to negotiate down but it can be done. Shipping lines are very reluctant to reduce this charge.
7.0 Import Airfreight
The process of import airfreight is similar to the process of import sea freight;
Rates are per kilo and apply by volume or weight whichever is the greater.
Airway Bill (AWB) preparation charges are negotiable; try to avoid them.
Suggestion 9: The best method to buy product overseas using airfreight is usually FOB.
Use the ex-works versus FOB piece price method to ensure you get a good deal. In this case you are asking for “flat FOB” charges, but these need to be broken down into their components from your forwarder avoiding percentage markups.
Airfreight FOB charges have essentially the same structure as sea freight, such as internal freight costs to airport, documentation charges, export and handling charges. However, they also can levy all sorts of “disbursement” charges, some quite strange and questionable. To alleviate this, flat FOB charges are desirable. This will eliminate any other “add-ons” being slipped in later. Check what elements the vendor has included in the FOB price.
Once again ensure your vendor fully accepts and understands the FOB charges they will be paying for and what you won’t be paying for. Inform your forwarder accordingly.
Airfreight does not have a formal BAF system, but has levied fuel and security surcharges (Sept 11 again). It is very hard to negotiate away these costs as the terrorist threat is here for the foreseeable future, although fuel prices are expected to fall during 2002.
The fuel surcharge issue should be raised with your freight forwarder.
Freight forwarders handle all import airfreight, not the airlines. One of the big issues with airfreight is the minimum airway bill charge. The airlines charge a minimum charge for all consignments with a weight of up to around 10kgs. Negotiating any airfreight forwarder to waive their minimum airway bill rate is very difficult. It can be done, but it is difficult to implement and maintain, especially as their overseas offices and agents are involved.
Suggestion 10: One method of solving this problem is to internationally courier all items less than 10kgs. It will be fast and includes pick up customs and delivery to your door. Do the comparisons between air and courier factoring all costs.
Suggestion 11: Try and ensure your freight forwarder has sufficient volume out of all the airports you plan to use, so that you know they can provide good rates and service to your company.
Suggestion 12: Ensure your forwarder can provide fax or email consignment documentation for pre customs clearance free of charge.
Suggestion 13: CAF on airfreight forwarders charge between 5-10% CAF on incoming shipments, supposedly to protect them against exchange rate fluctuations between origin departure and destination arrival. As most transit times are less than 5 days, this charge is invalid and can be easily reduced to zero.
8.0 Airfreight Arrival Charges
Customs clearance: essentially handled or negotiated the same way as sea freight. Minimum charges for small consignments should be virtually zero if the suggestion of using international couriers for small consignments has been adopted.
International Transfer Fee (ITF), this essentially is a charge made the forwarder and passed onto the customs agent to release documentation for consignment shipped by them to you by another forwarder at a cost of about $25-30.
However if you are using your airfreight forwarder to clear your goods this charge is waived. This is recommended as it makes the process more seamless and gives your more negotiating power. All your sea freight import customs work should be with the same customs agent. All that then needs to be done is to ensure your sea freight forwarder gets advance fax of sea freight documents for every shipment to your nominated customs clearance agent.
Storage charges: forwarders can charge you between $NZD0.06-0.10 per kilo per day if your goods are not picked up within 3-5 days of arrival. This can easily be negotiated to zero and free unlimited storage.
Transport of goods from airport to your premises are negotiable with a transport company, include sea freight volumes if appropriate
9.0 Export Sea Freight
As with import sea freight, the export rates are set by the shipping or conference lines by cubic metre/1000kg for LCL shipping or by full container load (FCL). Rates for export are set in NZD only for the trans-Tasman trade. All other rates are set in USD.
CAF and BAF are monitored and applied same way as import. BAF is applicable for all export routes but the only route that CAF is applied is the trans-Tasman trade at this time and should be negotiated or challenged (ref import notes).
CAF and BAF should be shown separately from the freight rate.
Check the applicable freight rate for your goods with your shipping line or forwarder if they are not “general type items” (FAK) e.g. refrigerated needs, food, etc.
Once again, unless you are a huge exporter, the best scenario is to use a freight forwarder, especially if you export numerous LCL shipments
For FCL consignments, insist on using ship’s currency rate struck, if shipping on C&F, CIF, FIS terms, except, of course, for trans-Tasman shipments that are in NZD
10.0 Export Charges
As with import all export charges are directly dependent on the way you sell your goods to an overseas buyer.
Ex-Works: generally the best option for the seller, as he only has to make goods available at his premises, but may have to pack a container or pack goods suitably for export.
FOB: Under FOB export terms the seller is responsible for all charges until the goods are loaded on board the ship or aircraft and must pay and be responsible for:
Freight rate which includes PSC Service charges both for LCL and FCL cargo. (few countries in world do this)
Minimum BOL charge of 1 cubic metre or 1000kg
C&F and CIF: The seller under these terms and conditions is taking on the responsibility to deliver the buyer’s goods to the destination port on time and undamaged. In addition to his FOB responsibilities, the seller needs to find a reliable shipping line or forwarder that can provide a good service, transit time and rate to the buyer’s nominated port, plus be cost effective and reliable (these aspects are very important, in order to keep repeat export business). The shipping line or forwarder also needs to demonstrate that they ship sufficient volumes of freight to the country you are interested in.
Under CIF terms, the buyer will require you to provide marine insurance for the consignment. If you have an ‘Open Marine Policy’ this is easy and costs you nothing, as in essence, you normally pay a set amount per year based on your proven or forecasted shipments.
Ensure that you have accurately and realistically priced your C&F or CIF piece price to your buyer, plus a reasonable margin.
Watch out for unique requirements that each respective country requires for import; for example, Australia, which requires that all shipments packed with wooden packing or pallets have a certificate accompanying them that certifies they are made of fumigated wood. Failure to provide such documentation can lead to the goods having to be fumigated in Australia causing delays and extra cost.
If you are selling on C&F /CIF and especially FIS, it is recommended that you maintain good communication and information flow with your customer.
FIS “Free into Store” means that the seller has the same obligations as CIF but in addition is also now responsible to deliver the goods to the overseas buyer’s premises “door to door” scenario.This is a complex and time consuming option and should be avoided by the seller if at all possible. Exporting on a FIS is quite common to Australia, less so to other countries.
Suggestion 14: new exporters should not attempt FIS, unless supported by a reliable and very experienced Freight Forwarder.
Under FIS terms, once the cargo arrives at the destination port the seller is responsible for:
Import Port service and handling charges
Local MAF/Quarantine inspection
Local taxes
Customs clearance
Inland transport
It must be realized, that conditions, regulations, and costs vary from country to country. No two are alike. Customs clearance and inland cartage can be very expensive, 3-4 times the cost of NZ. NZ has some of the cheapest customs clearance and inland cartage rates in the world. Things we take for granted here, like truck “swinglift” used to pick up and off load containers just aren’t available in the USA or UK and rarely in Australia.
Suggestion 13: If you are exporting FCLs to USA on a FIS basis by sea, one of the best methods is to ship into the US West Coast - Los Angeles, then use the container stacker trains that send FCLs all over the USA. The customer can then pick up his freight from the nearest rail-head (called ramps) to his premises.
FIS freight rates can be provided by the Forwarder either as one sum, or split into the ocean freight & inland portion. The second option is recommended.
11.0 Export Airfreight
The approach and process for export airfreight is based on the same principles as export sea freight.
Export airfreight charges are in NZD/kilo only for trans-Tasman traffic. All other countries’ rates are in their own currencies.
All handling and loading charges for export airfreight are included in the rate quoted
The only document change is that an AWB is generated instead of BOL and the documentation costs are similar. Minimum AWB charge applies to goods under 10kg.
To avoid min AWB charges, send all consignments under 10kg by international courier.
Ensure you choose a reputable air forwarder with short transit times to the customer’s airport/premises. They need to absolutely demonstrate that they can absolutely do what they claim they can do per country.
Ensure they will fax or email all export documentation to your customer promptly and free of charge.
All other FOB, CIF and FIS type charges, such as customs clearance, inland freight are the same as sea freight.
No BAF, but fuel surcharges and CAF can apply.
12.0 Negotiation Techniques for Export Sea and Airfreight
Approach several freight forwarders and ascertain what their services, transit times and expertise are in the countries your plan to export to, based on your selling terms.
They will need to provide airfreight rates/kilo, plus broken down costs of all FOB/CIF/FIS type charges, which need to be compared and negotiated.
All export documentation charges are negotiable.
The Flat FOB charge approach for export airfreight is not suitable.
Minimum BOL charges for LCL shipments should be able to be reduced from 1m3 to 0.5 m3.
All FIS type charges need to be supplied, broken down, verified and compared and negotiated based on “best price “ scenario
13.0 Payment Terms for Air & Sea Freight- Import/Export
If you are dealing directly with shipping companies the best payment terms possible are 7-14 days after ship has sailed.
Make use of offshore accounts to pay overseas charges.
If you are dealing with a freight forwarder and you have a reasonable level of business, then you can negotiate 20th month following terms. If you can consolidate all your freight business with one vendor for sea and one for air, this will strengthen your case for 20th of month terms.
FOB means that the seller of the goods must load the goods onto the container, deliver the container to the port and load it on a vessel. In case of break bulk cargo it has to be loaded on board the vessel. The buyer on the other hand takes possession of the goods when they pass over the ship's, rail at the named port of shipment. The buyer is therefore responsible for all costs and risk of loss of or damage to the cargo from that point. Under the FOB terms, the seller must clear the goods for export. Despite the fact that FOB term should only be used for sea or inland waterway transport, it is used for all kinds of transport in the everyday conversations among traders.
Under the FOB contract, the seller has no obligation for the freight cost or insurance cost, this is the responsibility of the buyer. When shipping commodities, the FOB term can be profitable for the buyer if the buyer is chartering a vessel. Usually a good freight rate can be negotiated providing the buyer is a frequent customer in the freight market. In shipping commodities, a saving of $1 to $3 per metric ton by the chartered party (a company chartering the vessel) can result in substantial additional revenue. On a 20,000 MT shipment this difference translates into $20,000-$60,000 profit. There are potential risks associated with chartering a vessel, such a demurrage. Nevertheless, there are ways to limit those risks to a minimum and still bear the advantages.
FOB Stowed or FOB ST. (Short for Stowed) term may often be seen in a commodity contract. Stowed or ST. means that the seller is responsible for stowing the goods loaded on board the vessel inside a vessels hall. Furthermore in addition to FOB Stowed the contract may mention FOB ST L/S/D. The term L/S/D stands for Lashing/Securing/Dunneging. In this case the Seller is also responsible and has to pay for L/S/D.
F.C.A. FREE CARRIER (.... NAMED PLACE)
Under the Free Carrier terms of sale, the seller must deliver the goods, clear the export into the possession of the carrier specified by the buyer at a specific location. The seller may choose a place where the carrier shall deliver the goods into his possession if no specific point is indicated by the buyer. Provided the buyer instructs the seller to deliver the goods to a freight forwarder who is not a "carrier", the seller is said to have completed his obligation when the goods are in custody. The seller must under FCA provide a commercial invoice in accordance with the contract of sale; provide at his own expense export license if required; bear all risks of damage or loss of goods until they have been delivered into the custody of the carrier, freight forwarder, or other person chosen by the buyer; provide enough notice that the goods have been delivered into the carrier's custody; provide the buyer with documentary proof stating that the goods have been delivered; pay any costs associated with checking quality, measuring, weighing, country etc. which are needed for the purpose of delivering the goods to the carrier.
The buyer's responsibilities under FCA terms are to pay for the goods; obtain at his own risk and expense any import license if needed; take care of all customs formalities; contract of carriage at his own expenses; take delivery of goods and bear the risk of loss of or damage to the cargo from the time that it is delivered. Incoterms set out other responsibilities for the buyers and sellers, most of which are common sense after the main distinctions are made. FCA terms are not as popular as FOB, CIF or CNF Incoterms among traders.
C.I.F. COST INSURANCE AND FREIGHT
(.... NAMED PORT OF DESTINATION)
Unlike the CFR term which was re-named from CNF, the CIF Incoterm did not change from the first publication of Incoterm in 1936. Together with the FOB term CIF is probably the most frequently used term in the international trade business. The only difference between CIF and CFR is insurance that the seller is responsible to obtain at this own expense for the contractual amount. The insurance usually covers the full value of the goods plus 10%. The insurance covers all risks including war risk from the seller's
warehouse to the port of discharge only.
The CIF term requires that the seller clear the goods for export. The buyer should be careful with CIF terms if he is acting as a trading house in the middle of the end buyer and supplier where a letter of credit is involved. For the same reasons as with CFR where the buyer controls the insurance of the goods, CIF value on the 2nd L/C will be different from the 1st L/C unless the trading house or 1st beneficiary under the L/C is not making any money on the transaction and transfers the L/C at the same face value. Since this is not the case in most transactions trading houses must be aware of this problem.
A solution can be found by asking the 2nd beneficiary (supplier) to contract the insurance for more than 10% over the invoice value to match the amount on the 1st L/C. Doing this may alert the suppler to the amount of profit, the trading house, is making on the transaction. Nevertheless, if such a situation occurs and you are stuck with a transferable L/C this may be only way out. There is however another more expensive solution, which is getting another spare insurance policy and substituting it to the bank during the document negotiation stage. Most banks will allow for such substitution of documents since you (the 1st beneficiary) are responsible for presentation of all documents required by the L/C. To avoid such problems from the start, it is best to ask for a CFR letter of credit and negotiate out the cost of insurance from the purchase contract
C.F.R. COST AND FREIGHT (.... NAMED PORT OF DESTINATION)
The main point of the CFR term of sale is that the seller's responsibility include the arrangement of the freight to bring the goods to an agreed port of destination at his expense. The buyer, however, is responsible for insuring the goods during transportation. It is not mandatory for the buyer to insure the goods, but if something should happen to the goods during transportation the seller could not be held responsible for the damage. After the goods have been delivered on board the vessel, the responsibility is transferred
from the seller to the buyer.
Under the CFR terms, the seller must clear the goods for export, but once the goods arrive at the port of discharge all duties and taxes are for the buyer's account and responsibility. The seller must provide the buyer with necessary export documents such as a full set of original bills of lading, certificates of origin, commercial invoices, certified if needed, etc. CFR term can only be used for sea and inland waterway transport.
In the commodity business the buyer usually prefers to organize the insurance and be the beneficiary in the insurance policy. This control of insurance allows the buyer quicker compensation in the event of cargo damage or loss. In case a letter of credit is involved and the buyer is a trading company acting as an agent, the control of insurance will allow him to insure the cargo for the amount stated in the first letter of credit (L/C) , assuming that the first amount is greater than the second amount on the back to back L/C or a transfer of the original documentary credit. If seller would be responsible for insuring the goods he would usually insure the goods for the invoice amount. Again, in order for a trading company in the middle of a transaction to avoid discrepancy of the L/C insurance value must correspond to the value requested on the first L/C. In case this point is overlooked ad the cargo is under-insured, the bank will find a discrepancy in the documents and the trading company will have a difficult time collecting payment from the buyer and honouring its obligation to pay the supplier.
Before the Incoterms were updated in 1990, CFR term was called CNF cost and freight. Some trading companies still use the old CNF term in their correspondence with each other.
