MA0059 Chapter 6A6

Learning Objectives
Determination of Freight rates

6. Understand the structure of the Freight market
6.1 Discuss how market equilibrium is achieved using the concepts of
surplus and shortage.
6.2 Discuss the main factors that influence the level of freight rates.
6.3 Describe the basic structure of tramp freight rates.
6.4 Explain the relationship between voyage and time charter rates
6.5 Summarise the main features of liner conference systems.
6.6 Describe the basic structure of liner freight rates.
6.7 Outline the basic structure for determination of freight rates for the
following:
i) International road haulage
ii) Container
iii) Inland waterway and short sea trades
LYF/April 2008 SP-SMA Slide 1
Learning Objectives
6.8 Describe Freight futures and Baltic International Freight
Futures exchange (BIFFEX)
6.9 Discuss the importance of Worldscale in determination of
tanker freight rates.
6.10Calculate voyage charter rates for oil tankers using New
Worldscale guidelines.
6.11Outline the role and function of the Baltic Mercantile and
Shipping Exchange and the Baltic and International
Maritime Conference (BIMCO).

Freight Rate
 Freight is the reward payable to a carrier for the carriage

of goods in a recognised condition.
 Freight depends on forces of supply and demand.
 Ships on any particular route are competing against:
 Other carriers on the same route
 Other carriers calling same ports but different
routes
 Air transport
 Inland transport
 Feeder carriers

Tramp and Liner Freight Rates
 Tramp vessels chartered on:
 Voyage basis
 Time basis
 Rates for the two kinds of contract generally move in the
same direction.
 Rates determined by supply and demand of ships.
 Liner freight is charged on tariff prices which are issued
by liner conferences.
 Liner rates are based partly on cost and partly on value.

Tramp and Liner Freight Rates
 Commodities of high value are charged ad valorem rates.
 Many freight rates are quoted on the basis of weight or
measurement i.e. rates/tonne or rates/m3 whichever
produces the greater revenue.
 If cargo is <1.2 m3, it is charged by weight.
 If cargo is >1.2 m3, it is charged by volume.
 Additional charges are usually made for heavy lifts, out-

of-gauge cargo, reefers and dangerous cargo.

Factors influencing the level of
freight rates by Liner Companies
 Competition:
 Member of liner conferences charge uniform rates
 Non liner conference members providing regular
services
 Irregular sailings by speculative ship owners
 Air transport , Rail, Barges
 Nature of the commodity, no. and types of containers
(FCL), amt of cargo, (by LCL), BAF, CAF, THC
 Place of loading and discharge
 Terms or conditions of carriage - SD/SD, CY/CY
 Additional requirement - heavy lift/OOG/RF/DG
 Type of vessels - container vessels, Ro/Ro, general cargo
ship, barges
Determination of Fixture Rates for
Tramp Vessels
 Supply of chartered tonnage
 World economic outlook
 Type of vessels in demand
 Rates for vessels of a common specification will tend to
fluctuate more widely than those for specialised or purpose
built ships.
 Duration of charter party
 Overall cost of providing the vessel

 Depends on fixed and variable cost
 Ship specification
 Capacity, speed, draft, age, limitations

Describe the factors that affect the freight
rate of a voyage charter of a bulk carrier.
 Types of cargo
 POL/POD (distance)
 Supply/demand of bulk carriers
 Size of the ship (Capesize, Panamax,
Handymax)
 Terms of charter/carriage (FIO)

rate of a voyage charter or charter hire of a
time-charter

Charterer’s Requirement
 Desired Capacity
 Load Displacement, light displacement, deadweight, grain
capacity, bale capacity
 Speed
 Type of propulsion
 General layout of the vessel
 Including number of hatches, lifting gear
 Trade and ports of call
 Determine the type of vessel reqd, draft, length, beam
 Date and place of commencement and duration
 Type of charter: Demise, voyage, time charter
 Type of cargo
 Classification and registration of the vessel
 The range of fixture rates the charterer considers viable.

Voyage Charter Time Charter Bareboat
Charter
(Demise)
Definition Charter for a 1 Charter for a Charter for a

or more period of time period of time.
voyages
Payment $/tonnes $/day $/day
Capital cost S/O S/O S/O
Operating Cost S/O S/O Charterer
Voyage cost S/O Charterer Charterer

Liner Conference
 A conference is an incorporated association of mutually competitive
liner operators maintained for the purpose of:
 Setting rates for all members to avoid price war

 Rationalising capacity
 Protect members through co-operative action from external
competition.
 Controlling competition between conference members and non-
conference lines.
 UN definition - A meeting of lines, serving any particular routes

aimed at agreements on uniform stable rates of freights and the
provision of services under stated working conditions in the trade.
 It ranges from very informal associations to a well developed

organisation with a permanent secretariat behind it.

International Road Haulage
Freight Rates
 Based on volume, weight, commodity,origin/destination
of cargo
 Rates charged for the carriage of vehicles or trailers on
vehicular ferries are based on:
 trailer/vehicle length
 Loaded or empty
 Accompanied or unaccompanied
 Additional charges for:
 Valuable cargo
 O/H, O/L, O/W

Maritime Container Rate
 Rates for Full container load (FCL) are determined by:
 Container type - GP/FR/OT
 Origin/Destination
 Through rate includes:
 Inland transportation cost
 Terminal handling expenses but
 Excluding custom clearance charges and
demurrage.
 Rates for Less than container load (LCL)
 Good stuffed into containers making up a container
load.

Short Sea Trades
Factors determining fares:
 Length of voyage
 Competition from other shipping lines
 Competition from airlines
 Operating cost(Running cost)
 Voyage cost
 Port dues for passengers and vehicles
 Season, day of the week, time of travel
 Class of travel, adult or child, type of cabin
 Party travel
 Length of car and number of accompanying passengers
 Government statutory control over fares
Real market/Physical market
 When freight goes up, ship owner earns more

money from physical market.
 When freight goes down, he earns less money
from physical market.
 Th4 earning depends on the movement of the
freight in the spot market.


Freight Futures
 A future contract is a binding agreement:
 To buy or sell for a definite future date
 At a specified price
 A standardised quantity of a product of fixed quality
and on a fixed conditions of settlement.
 The Baltic Freight Index (BFI) has been created:
 From the daily movements in the cost of
transportation
 Thereby providing the market with voyage rates and
indices based on freights per tonne of cargo.
 These 13 indices are computerised together with a
percentage weighing reflecting the relative importance of
each voyages.

Freight Futures
 A panel of London’s well known shipbrokers, submit
each trading day the spot freight rate which they consider
applicable to each of the voyages that contribute to the
Index.
 The Baltic Exchange then averages these freight rates,
applies the fixed weighting and compute the weighted
level of the market for that market.
 Nominal standard of Freight Index is:
 1000 points.  Good; Poor

Freight Futures
 Purpose of freight futures:

To avoid volatility in earnings by hedging
the physical market.
 Hedging = Taking opposite position to
protect your interest/money against loss

Freight Futures
 When a ship owner takes part (sell futures
contract) in freight futures:
 When freight goes up, he earns more money
from physical market But loses in futures
market.
 When freight goes down, he earns less money
from physical market but gains in futures
market.
 His earning is stabilised and avoided the
volatility.
Freight Future
 When a charterer takes part in freight future:

 When freight goes up, he pays out more money
in the physical market But gains from the future
market.
 When freight goes down, he pays less money in
the physical market but lose in future market.
 His earning is stabilised and avoided the
volatility.

Baltic & International Maritime
Council (BIMCO)
 Founded in 1905 by a group of shipowners
 Serves as a forum in which shipowners and other persons and
organisations connected with the shipping industry can get together
and discuss all matters affecting the ship industry and establish
contact with charterers, shippers, merchants, receivers.
 4 categories of members:
 Owner-member: ship owners or ship managers
 Broker-member: shipbrokers, ship agents and chartering agents
 Club-member: P & I Association, Shipping federation, freight
association
 Associate-member
 General meeting held every 2 years
 Development of standard C/P and bills of lading, ship management
and ship agency documents for use throughout the shipping industry.

Worldscale (WS)
 Is Worldwide Tanker Nominal Freight Scale

 An index of tanker freights
 Intended solely as a standard of reference or guideline
 Contains about 65,000 rates in two sections
 1st section = Between one loading and one discharging port
 2nd section= Multi-port voyages
 Also contain a list of demurrages
 WS 100 is a base rate calculation for a full cargo of crude oil
products transported on a round voyage from loading port or ports
and back to the first loading port.
 Express market levels of freight in terms of a direct percentage of
the scale rates. Eg W85 means 85% of the rate published
LYF/April 2008 SP-SMA

Slide 23
Rates calculated on the basis of a round voyage from
loading port or ports to discharging port or ports and
return to first loading port by reference to the following
 Std vessel of 75,000 dwt

 Speed 14.5kts
 At sea bunker consumption 55 tonnes per day
 5 tonnes consumption for each port
 Additional 100 tonnes per round voyage
 Fixed hire element of USD 12,000 per day
 Laytime allowance of 72 hours for loading and discharging
respectively
 Port time (not courting as laytime) of 12 hours for each port
 Canal transit time of 24H and 30H for PNM and Suez Canal
respectively

Definitions
 DEADFREIGHT
 Amount of money payable by a shipper or charterer to a ship
owner or shipping line for failing to load the quantity of cargo
stipulated in the contract of carriage.
 DEFERRED REBATE
 Discount on the freight,offered by a liner conference to a
shipper, which is payable at some agreed time, normally several
months, after the date date of shipment, provided that the shipper
does not ship any cargo during this period with a non-conference
line to any destination served by the conference.
 BAF = BUNKER ADJUSTMENT FACTOR = BUNKER
SURCHARGE
 Extra charge applied by shipping lines and liner conferences to
reflect fluctuations in the cost of bunkers. This surcharge is
expressed either as amount per freight tonne or as a percentage
of the freight.
Tutorial 6 (T or F)
1. Voyage charter rates tend to fluctuate more widely than

time charter rates.
2. Freight rate of containers does not depend on forces of
supply.
3. Charter hire of ships depends on forces of supply.
4. Conference carriers use price differentiation to compete
with non-conference carriers.
5. Freight rate for out-of-gauge cargo, reefers and dangerous
cargo are higher than general cargo.
6. Name all the conference carriers.
7. Transpacific Stabilisation Agreement
8. Name all the non-conference carriers.
Tutorial 6
6. What is a liner conference and state its objectives?
7. Compare dry cargo trade and tanker market.
Tanker Dry Cargo
Loading Ports
Ballast
passage

Worldscale
1. Find flat rate required (USD/mt) from A7 – A10.
2. Find variable rate differential (USD/mt) from A6.
3. Add (1) and (2) to get WS 100.
4. Convert (3) to WS required.
5. Multiply (4) with the total of cargo loaded to give you
freight payable.
6. Find fixed rate differential from A4 – A5.
7. Apply lump sum amount if any from A4.
8. Apply lump sum amount (from NOTES) if any from A4.
9. Total freight payable = (5) + (6) + (7) + (8)

Tutorial
 Vessel DWT is 150,000 mt. She is loading
100,000 mt of crude oil at Sirri Island in Iran for
London discharge. Vessel SCNT is 80,000.
Vessel draft after loading is 50 feet. The WS is
WS 150.
a. Calculate the freight payable from Sirri Island
to London via Suez (northbound laden and
southbound ballast).

Sirri Island - London
1. Flat rate from Sirri Island – Quoin Island = USD/MT 0.97
Flat rate from Quoin Island – London = USD/MT 9.86
Flat rate from Sirri Island – London = USD/MT 10.83
2. Variable rate differential = USD/MT 0
3. At WS 100 = USD/MT 10.83
4. At WS 150, 10.83 x 1.5 = USD/MT 16.25
5. To load 100, 000 mt, = 100,000 x 16.25 = USD 1,625,000
6. Fixed rate differential = 2.85 x 80,000 = USD 228,000
7. Apply lump sum amount = USD 145,825
8. Apply lump sum amount = USD 7,500
9. Total freight payable = USD 2,006,325

Tutorial 6
8. How is the following affecting the freight rates of liner
shipping?
I. Technological progress
II. Economies of scale
III. War
IV Closure of Suez Canal
V Seasons
VI. Regulations
VII. Economic outlook
Name other causes not mentioned above

Worldscale
1. Using extracts of WS provided to you, calculate the
following:
i. WS flat rate (WS 100) and distances for the following
voyages:
a. Montreal/London $6.29
b. Rostock/London $3.31
c. La Plata/London $10.59
d. Ras Tanura/London (via Suez) $10.52
e. Kharg Island/London (via Cape) $17.23
f. Piraeus/Rotterdam (Products) $5.24

Worldscale
1. Find flat rate required (USD/mt) from A7 – A10.
2. Find variable rate differential (USD/mt) from A6.
3. Add (1) and (2) to get WS 100.
4. Convert (3) to WS required.
5. Multiply (4) with the total of cargo loaded to give you
freight payable.
6. Find fixed rate differential from A4 – A5.
7. Apply lump sum amount if any from A4.
8. Apply lump sum amount (from NOTES) if any from A4.
9. Total freight payable = (5) + (6) + (7) + (8)

Tutorial
100,000 mt of crude oil at Pladju for Rotterdam
discharge. Vessel SCNT is 55,000. Vessel draft
after loading is 46 feet. The Worldscale rate is
WS 85.
Calculate the total freight payable from Pladju to
Rotterdam via Suez (northbound laden and

WS Calculations
1. Flat rate (WS100) from Pladju to Rdm = USD 13.20/mt
2. Variable rate differential (VRD) at Rdm = USD 0.65/mt
3. Flat rate + variable rate differential at WS100 = USD 13.85/mt
4. At WS85, USD 13.85 x 0.85 = USD 11.77/mt
5. Freight to carry 100,000 mt = 100,000 x USD11.77= USD 1,177,000
6. Fixed rate differential (FRD) = USD3.19 x 55,000= USD 175,450
7. Lump sum = USD 120,500
8. Lump sum = USD 0
9. Total freight payable = USD 1,472,950

Worldscale
1. Using extracts of WS provided to you, calculate the
following:
i. WS flat rate (WS 100) and distances for the following
voyages:
a. Montreal/London
b. Rostock/London
c. La Plata/London
d. Ras Tanura/London (via Suez)
e. Kharg Island/London (via Cape)
f. Piraeus/Rotterdam (Products)

Tutorial
100,000 mt of crude oil at Pladju for Rotterdam
discharge. Vessel SCNT is 55,000. Vessel draft
after loading is 46 feet. The Worldscale rate is
WS 85.
Calculate the total freight payable from Pladju to
Rotterdam via Suez (northbound laden and

Tutorial

120,000 mt of crude oil at Zirku Island for
Rotterdam discharge. Vessel SCNT is 71,000.
Vessel draft after loading is 48 feet. The WS is
WS 90.
a. Calculate the flat rate from Zirku Island to
Rotterdam.
b. Calculate the total freight payable from Zirku
Island to Rotterdam via Suez (northbound laden
and southbound ballast).

rate of a bulk carrier in a voyage charter.

Describe the factors that affect the total
freight of shipping a container from
Singapore to New York.

Describe the factors that affect the charter
hire of a tanker on a time charter

 When freight goes up, ship owner will earn more money from the
physical market.
 When freight goes up, it will cause the (BDI) index to go up.
 This will cause the value of the future contract to increase.
 Th4 when the ship owner buys back the future contract he has to
pay more.
 In summary, he sell low and buy higher. Hence ship owner lose
money in the freight future.
 This helps to stabilise his earning.

Learning Objectives
6. Understand the structure of the Freight market
6.1 Discuss how market equilibrium is achieved using the concepts of
surplus and shortage.
6.2 Discuss the main factors that influence the level of freight rates.
6.3 Describe the basic structure of tramp freight rates.
6.4 Explain the relationship between voyage and time charter rates
6.5 Summarise the main features of liner conference systems.
6.6 Describe the basic structure of liner freight rates.
6.7 Outline the basic structure for determination of freight rates for the
following:
i) International road haulage
ii) Container
iii) Inland waterway and short sea trades
Tutorial
90,000 mt of crude oil at Mina Khalid for
Rotterdam discharge. Vessel SCNT is 71,000.
Vessel draft after loading is 50 feet. The
Worldscale rate is WS 105.
Calculate the total freight payable from Mina
Khalid to Rotterdam via Suez (northbound laden
and southbound ballast).

WS Calculations
1. Flat rate (WS100) from Zirku to Quion Is = USD 0.64/mt
Flat rate from Quion Is – Rotterdam = USD 9.58/mt
2. Variable rate differential (VRD) at Rdm = USD 0.65/mt
3. Flat rate + variable rate differential at WS100 = USD 10.87/mt
4. At WS90, USD 10.87 x 0.90 = USD 9.78/mt
5. Freight to carry 120,000 mt = 120,000 x USD 9.78 = USD 1,173,600
6. Fixed rate differential (FRD) = USD2.85 x 71,000= USD 202,350
9. Total freight payable = USD 1, 529,275

MA0059 Chapter 6A6

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Learning Objectives

Determination of Freight rates

LYF/April 2008 SP-SMA Slide 2

 Freight is the reward payable to a carrier for the carriage

LYF/April 2008 SP-SMA Slide 3

LYF/April 2008 SP-SMA Slide 4

 Additional charges are usually made for heavy lifts, out-

LYF/April 2008 SP-SMA Slide 5

 Overall cost of providing the vessel

LYF/April 2008 SP-SMA Slide 7

LYF/April 2008 SP-SMA Slide 8

LYF/April 2008 SP-SMA Slide 9

LYF/April 2008 SP-SMA Slide 10

Definition Charter for a 1 Charter for a Charter for a

Payment $/tonnes $/day $/day

Capital cost S/O S/O S/O

Operating Cost S/O S/O Charterer

Voyage cost S/O Charterer Charterer

LYF/April 2008 SP-SMA Slide 11

 Setting rates for all members to avoid price war

 UN definition - A meeting of lines, serving any particular routes

 It ranges from very informal associations to a well developed

LYF/April 2008 SP-SMA Slide 12

LYF/April 2008 SP-SMA Slide 13

LYF/April 2008 SP-SMA Slide 14

 When freight goes up, ship owner earns more

LYF/April 2008 SP-SMA Slide 16

LYF/April 2008 SP-SMA Slide 17

LYF/April 2008 SP-SMA Slide 18

 Purpose of freight futures:

LYF/April 2008 SP-SMA Slide 19

 When a charterer takes part in freight future:

LYF/April 2008 SP-SMA Slide 21

LYF/April 2008 SP-SMA Slide 22

 Is Worldwide Tanker Nominal Freight Scale

LYF/April 2008 SP-SMA

 Std vessel of 75,000 dwt

LYF/April 2008 SP-SMA Slide 24

1. Voyage charter rates tend to fluctuate more widely than

Tanker Dry Cargo

LYF/April 2008 SP-SMA Slide 27

LYF/April 2008 SP-SMA Slide 28

LYF/April 2008 SP-SMA Slide 29

LYF/April 2008 SP-SMA Slide 30

Name other causes not mentioned above

LYF/April 2008 SP-SMA Slide 31

LYF/April 2008 SP-SMA Slide 32

LYF/April 2008 SP-SMA Slide 33

LYF/April 2008 SP-SMA Slide 34

LYF/April 2008 SP-SMA Slide 35

LYF/April 2008 SP-SMA Slide 36

LYF/April 2008 SP-SMA Slide 37

 Vessel DWT is 138,000 mt. She is loading

LYF/April 2008 SP-SMA Slide 38

LYF/April 2008 SP-SMA Slide 39

LYF/April 2008 SP-SMA Slide 40

LYF/April 2008 SP-SMA Slide 41

LYF/April 2008 SP-SMA Slide 42

LYF/April 2008 SP-SMA Slide 44

LYF/April 2008 SP-SMA Slide 45

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