Shipping Costs: Know the Costs that Make Your Freight Budget

Transportation cost is one of the biggest components of a complete product supply chain. According to this article published in The Hindu, transportation costs work out to be one-third of the total cost. 

Given the impact of transportation expenses on the total cost and on the final price of the product, it is important for traders to know about all the charges that are incurred when they transport their goods from one destination to another. This information also helps them in creating their long term business plans. 

Generally, the costs incurred in shipping goods from one destination to another can be classified into three categories – fixed costs – which are incurred for all shipments, variable – seasonal charges, and situational charges – specific to a particular shipment or situation. While the fixed costs need to be incurred, the variable costs can be controlled and the situational costs can be avoided by proper planning and execution. 

Here is a break up of some of the main costs that are a part of an international freight transportation. 

Fixed Components: 

Fixed costs are charges that are incurred or should be incurred for all shipments. Some of the common fixed costs are: 

Ocean Freight: This is the charge incurred for shipping the goods from one port to another. It is one of the main costs that is incurred in international logistics. As the name suggests, this is the charge for shipping from port to port only.

Inland Transportation Costs: The costs incurred in transferring goods to the port location from an inland destination is dependent on a variety of factors like distance and the mode of inland transportation used. Ideally, for locations that are far away from the port, rail transport is preferred. 

In India, for inland locations, traders usually hand over the goods to the shipping line at an ICD (dry port). The shipping line charges IHC (Inland Haulage Charge), to move the goods from the ICD to the port of loading. 

Handling Charges at loading and Unloading Points: Each point of loading and unloading starting from the first point – the warehouse, incurs a handling charge. Usually, the charges at the port and the railway loading and unloading points are fixed by the managing authorities. The port handling charges are also known as THC (Terminal Handling Charge). 

Cargo Insurance: Cargo insurance is necessary. It helps protect the traders financially in case of any mishap during the transportation. 

Secondary Packaging Costs: Secondary packaging is an important part of the entire product packaging. It helps in maintaining the quality and safety of the product being shipped. 

Documentation Charges: This is a charge levied by the shipping line for releasing the Bill of Lading. 

Customs Clearance Charges: Another non-negotiable charge is the customs duty and the customs clearance fee. In India, exporters are given some incentives to encourage foreign trade, hence not all goods are charged an export duty. But, even if the goods are exempt from customs duty, the shipment would still be incurring a customs clearance charge. 

In case an agent is hired for the service, there will be an additional charge for the agent’s services. Similarly, importers also need to pay customs clearance charges and the customs duty (if applicable) on their imports.

Variable Components: 

Variable costs are seasonal charges or costs specific to a shipment that are levied according to government or trade legislation. Some of the common variable charges that are levied from time to time are: 

BAF: Also known as Bunker Adjustment Factor or Bunker surcharge, this charge is levied to adjust for fluctuating fuel prices. BAF is charged as and when there is fluctuation in fuel prices. It is usually imposed for certain time period or for specific routes. 

CAF: The Currency Adjustment Factor is a surcharge levied by the shipping lines on the freight rate to offset any losses that may arise due to the fluctuating currency rates. 

Peak Season Surcharge: As the name suggests, this surcharge is only applicable when the demand for a certain route exceeds the supply. 

Winter Surcharge: Like the name suggests, this surcharge is levied only for specific ports where regular shipping operations are affected due to the unpredictable and harsh weather during the winters. It is usually charged for shipments starting from December and lasting till March. St. Petersburg and Ust-Luga in Russia are two of the ports where this surcharge is imposed. 

Port Congestion Surcharges: This surcharge is applicable only when port operations are affected by the heavy container traffic at the port. It is a surcharge collected by the shipping lines to offset any losses that may be incurred due to delay in the vessel operations. 

GRI: General Rate Increase is charged by the shipping lines when there is an increase in the base ocean freight rates. Like the Peak season surcharge, this is also a function of demand and supply. 

Situational Charges: 

Situational charges refers to all the charges that depend on the shipment, additional service requested, or fines and penalties incurred by the shipper. Some of the common situational charges are: 

Transhipment Surcharge: This expense is incurred only if a transhipment is planned for a shipment. It takes into account the handling and storage of the container at the transhipment port. It is a part of the ocean freight.

IMO Surcharge:  This cost is incurred on transportation of hazardous or dangerous goods. It is an addition to the regular freight charges. 

Heavy Weight Surcharge: Each container type has a certain weight limit. If the cargo weight exceeds the set limit, then a heavy weight surcharge is levied on the shipment. 

Detention and Demurrage: Demurrage is a fine payable by the importer in case he fails to collect the cargo on time from the port. Detention is the charge payable by the importer if he neglects to return the empty container to the shipping line after the “free day” time period is over. 

Other Fines and Penalties: Apart from the above charges, depending on the port procedures traders might be liable to pay fines or penalties if they have not been able to follow the timelines set by the port or the shipping carrier. 

This is an indicative list of the charges that are incurred in an international trade transaction. The traders/shippers should get in touch with their shipping line or forwarder to get the exact charges applicable.