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.