Correlation between demurrage, detention and freight rates
Demurrage and Detention – two terms that may be at the top of the most controversial charges levied by shipping lines..
While shipping lines may consider demurrage and detention a necessary evil, importers and exporters around the world may beg to differ..
A question that one of the readers raised was
Is there a correlation between demurrage and detention and freight rates..??
In very simple terms,
Demurrage is a charge levied by a shipping line to the consignee while the full container is in their custody within a port or terminal..Detention is a charge levied by a shipping line to the consignee from the time the full container is released till the time the empty container is returned to a container depot nominated by the shipping line..
So why this question..??
In the recent past, there have been several discussions about applicable and tariffs for demurrage and detention charges set by the shipping lines..
Shipping lines have been accused of increasing the tariffs for demurrage and detention while reducing free time, both of which impacts severely on the bottom line of the consignee..
Shippers and consignees have accused shipping lines of trying to generate revenue from demurrage and detention to the extent that they are calling it an abuse by the shipping lines to maximise profits..
But is this true and could there a case by the shipping lines for this..??
The shipping lines quote freight rates based certain calculations such as slot costs, vessel operating costs, port costs, container lease costs, supply and demand and port pair combination..
In some markets, the shippers and consignees “demand” additional free days.. Sometimes 14 free days at Origin and 21 free days at Destination for the same shipment so around 35 free days in total per container per shipment..
As we all know, not all the containers operated by the shipping lines are owned by them and they lease containers at a cost.. For each day the line uses the container, they pay the leaseco.. Whether they offer those days as “free” to the customer or not, it is not the leaseco’s concern and they have to be paid by the line..
In addition, the line must also consider the carriage time which in many deep sea routes could be between 21-35 days.. So for one shipment the customer could be using a container for between 56-70 days which means that container is not available to the shipping line and thereby is not generating revenue..
Wait, there is more.. Depending on the trade, there are several combinations of freight offerings including containers moving at freight levels of $0-5 per container, freight rates including THCs on both ends etc etc..
So if you look at it from the shipping line’s perspective there may be a case why the lines may be reducing the free days and increasing the demurrage and detention charges..
Lines consider demurrage and detention charges to be a valid charge and a tool for them to ensure that the containers are being turned around in the quickest possible time and firmly believe that users who exceed the agreed free time for the usage of the container should be charged, a fact that FIATA also acknowledges..
Trade and Shipping Lines
If you look at below chart from the FBX, one can see the trajectory that the freight rates are taking and that is in no way good for trade.. If the rates continue to fall and not reach a sustainable level, more lines could disappear which means lesser choices for the customers in a market with already limited options..
Trade needs to remember that they need the shipping lines as much as the shipping lines need them and need to stop basing everything on ocean freight rates (already one of the smallest component of their logistics costs) and stop cutting the lines down in terms of freight rates..
Already the top 25 container lines in 2019 is vastly different from what it was at the turn of the century.
Below were the top 25 container operators in the year 2000 in terms of TEU capacity and % share in the market.
Fast forward to 2019, the top 25 container operators in terms of TEU and % of market share are as below.
Main difference between 2000 & 2019 = Mergers & Acquisitions
Hanjin Shipping (4th largest container operator in 2000) was declared bankruptHapag Lloyd & UASC (16th and 17th largest container operators respectively in 2000) merged to become the 6th largest container operator in the worldCosco and China Shipping (7th and 18th largest container operators respectively in 2000) merged to become the 4th largest container operator in the worldCMA-CGM took over NOL (including APL – 6th largest container operator in 2000) to become the 3rd largest container operator in the worldMaersk Line acquired Hamburg Sud (20th largest container operator in 2000) adding to its already strong position in the list as the largest container operator in the worldCosco acquired OOIL the holding company of Orient Overseas Container Line (OOCL)3 Japanese carriers Kawasaki Kisen Kaisha (K Line), Nippon Yusen Kabushiki Kaisha (NYK) and Mitsui O.S.K. Lines (MOL) to create a JV called ONE (Ocean Network Express)
Many pundits described Hanjin Shipping’s demise as probably the biggest wake up call for container shipping in recent history..
While it may not have been driven by the spectacular collapse of Hanjin Shipping, the resolve by the container shipping lines to consolidate their position was most probably strengthened following the collapse..
New alliances were formed between the various lines (mainly in the top 10) which eventually evolved as as below currently in 2019.. This will further change from 1st of April 2020 when HMM leaves 2M and joins THE Alliance..
But the alliances, which account for almost 82% of the global capacity, also creates a worry for the customer about collusion (not uncommon in shipping) etc although all of the alliances have been cleared by competition and anti-trust commissions..
Impact of demurrage and detention
Shipping lines should not lose money because customers are delaying the return of the containers but at the same time, trade should also not be penalised for cases which maybe beyond their control..
“Fact Finding 28” was an investigation by the FMC focused on “the practices of vessel operating common carriers and marine terminal operators related to detention and demurrage charges.”..
This investigation was undertaken by the FMC on the back of petitions and testimonies from shippers, intermediaries, and container transport interests faced with congestion in the main USA gateway ports of Los-Angeles/Long Beach on the West Coast and New York-New Jersey on the East Coast..
The impact of demurrage and detention on a customer could be quite profound in cases like above.. Let me illustrate the problem with an example..
CMA-CGM’s demurrage and detention tariff is as below* :
* (CMA-CGM and the tariff has been used as an example ONLY and has no other bearing on this discussion..)
In the above example, a 20′ General Purpose Container (GP), is allowed a total of 5 free days within which the customer has to take the full container out of the terminal, unpack it and return it to the empty container depot nominated by CMA-CGM..
If the container stays inside the terminal for more than the 5 free days, then from day 6, there is a demurrage of USD.220/20’/per day applicable..
If the container has been taken out of the terminal within the 5 free days, but not returned as empty, then from day 6 to day 10 there is a detention of USD.115/20’/day applicable and if it takes more than 11 days there is a detention of USD.165/20’/day applicable..
The lines charge different demurrage and detention rates for general containers and special containers.. Each line’s tariff could be different for different types of containers in different ports and we will not delve into such detail here..
Now imagine a customer who has 10×20′ GP containers stuck in the terminal not cleared, not moved, not delivered for say 10 days due to the congestion..
As per above calculation, the customer will be liable for demurrage charges for 10×20’containers @ USD.220/20’/day = 10 (containers) x 10 (days) x 220 (demurrage amount)) = a whopping USD.22,000/- on a single shipment!!!!!!
So you can imagine why the trade is also upset and they also may have a case against demurrage and detention on this..
While the question of whether demurrage and detention charges are justified rages on, customers and shipping lines together must analyse the causes of demurrage and detention and come to an agreement on which are genuine reasons and which are not and come to some agreement..
In my article, I highlighted some of the major causes of demurrage and detention as :
Delays due to incorrect documentationDelays due to late receipt of documentsDelays due to loss of documentsDelays due to customs clearance or cargo inspectionDelays due to release of cargo at destinationDelays due to receiver being unreachable
In 2018, FIATA’s Multimodal Transport Institute Working Group Sea released their a “Best Practice Guide” with a focus on best practices which may help reduce costs for the customer and also outlined behaviours that lead to detention and demurrage charges..
Customers must look at all possible ways of avoiding or reducing their demurrage and detention charges because in the end, they are liable for the same and lines must support the genuine customers with genuine reasons because in the end, if customers go bust so will the lines..
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