Somewhere between 80% and 90% of freight shipped around the world moves via the ocean. That’s a lot of goods! High freight volumes mean that a lot of negotiating shipping rates occurs in this segment of the transportation market.
So how can shippers master freight negotiation with shipping companies that offer ocean transport? Read on to learn more.
NEGOTIATING OCEAN FREIGHT RATES
The keys to negotiating ocean freight rates aren’t really that different from negotiating the terms offered by any other service provider.
Successful negotiation starts with educating yourself on the matter, which in this case means getting familiar with the types of ocean freight shipping options available, which services you need, and the market rates and common rate structures. This knowledge helps shippers go into negotiations grounded and informed.
Once shippers enter the negotiation phase, they should keep in mind that flexibility is key and, while a great rate is nice, it doesn’t mean anything if a quality service isn’t rendered.
By diversifying their carrier base, shippers leave themselves with a little more wiggle room. It’s critical to keep in mind that the best outcome in a negotiation is both parties getting a fair rate.
HOW TO CALCULATE OCEAN FREIGHT RATES
Ocean freight rates are usually calculated depending on the mode of transportation.
- Typically, LCL (less than container load) is calculated based on weight and measurement.
- FCL (full container load) is calculated per type of equipment.
Ocean freight rates are often written as cost per kilogram, which makes sense since most of the world uses the metric system and ocean shipping is a global endeavor.
However, despite this simplistic explanation, calculating ocean freight rates isn’t all that simple. The following factors majorly play into ocean freight rates and can fluctuate rapidly as the market or other economic conditions shift:
- Frequency of shipments
- Freight volume
- Freight class
- Fuel prices
- Regulatory concerns (emissions requirements, etc.)
- The size of packages in the shipment
- The type of contract between the carrier and shipper
- The insurance necessary to cover the expense of replacing cargo in the event of damage
- The size of the container
- Whether the shipment will utilize a full container (FCL-full container load) or will share a container with other cargo (LCL-less than container load)
- Special handling requirements, including:
- RORO (roll-on, roll-off)
- Project cargo
- Out of Gauge
- Reefer
- Flexitank
If you are relatively new to ocean freight negotiation, bearing in mind the above elements will help you to keep up with the proposition.
COMMON OCEAN FREIGHT TERMS, SURCHARGES, AND FEES
The terms and costs of an ocean freight shipment are often split into pre-carriage (before the ship), on-carriage (after the ship), and carriage (on the ship) charges. Here are some common fees and surcharges that are included in ocean freight contracts.
- Drayage fees- These account for the movement of goods to or from the ship (i.e., a container being pulled off a rail car near the port and moved to the port itself for loading)
- Fuel surcharges- These charges help account for fuel prices
- Low sulfur surcharges- To cover the additional costs of using low emissions low sulfur fuel
- Bunker adjustment factor (BAF) and emergency bunker surcharge- These are both fuel surcharges that help carriers account for spikes in fuel prices
- Currency adjustment factor- This accounts for currency fluctuations between the US dollar and currency in the country of origin; most common on shipments coming from the Pacific Rim
- Verified gross mass fee- This is essentially a charge levied for weighing the cargo inside of the container
- Heavy lift and Out of Gauge fees- For cargo that is heavy or large enough to not fit in a regular container
- Carrier security fee- Ports charge carriers a fee to offset the costs of maintaining an ISPS secure port, and carriers pass that fee onto shippers.
3 COMMON TYPES OF OCEAN FREIGHT CONTRACTS
- Long-term contracts- Long-term contracts are generally set for one year, sometimes two years. Rates and surcharges are typically fixed during the contract period.
- Short-term contracts- Short-term contracts may cover a fixed-price period of a month or a quarter.
- Index-linked contracts- Index-linked contracts have become more popular in the past couple of years of price volatility. These types of contracts are based on an external index. This means rates are closely in line with market rates at the time of shipment.
4 TIPS TO HELP SHIPPERS REST EASY IN THEIR OCEAN FREIGHT CONTRACTS
- Read the contract thoroughly before signing. Your freight rates should never come as a surprise; it’s in the contract!
- Vet potential carriers carefully. Using a carrier with a solid reputation can go a long way toward making sure the service meets expectations.
- Be sure the carrier understands your needs. With variations in terminology and differences in pricing structure, it’s important to get an accurate idea of what your contract rates will get you and whether the carrier understands your particular needs to ensure the terms align.
- Build relationships with carriers. This can help during negotiations and with communicating, organizing and executing shipments.
TIPS FOR OCEAN FREIGHT SHIPPING NEGOTIATIONS
Keep in mind these tips when actively negotiating, and they may just help you secure a better deal, or avoid any disastrous mistakes.
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Always get the payment terms in writing
It can be quite easy to forget to get payment terms in writing, particularly if you’re a less experienced negotiator.
Acquiring written terms is vital, though, for ensuring the final contract is as you desire.
By getting the initial payment terms down in writing, you avoid either party forgetting the initial terms, which may come in the form of a verbal contract, which can be hard to enforce. If the final contract isn’t then as you desire, there is room to contest and renegotiate to meet the original terms.
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Don’t be afraid to walk away from negotiations
Negotiations can be tricky to navigate, and don’t always work out in your favor. You may also have issues like that mentioned above, where the final contract doesn’t meet the agreed verbal contract.
In these situations, don’t be afraid to walk away and begin negotiations again with another shipping company. There may be situations where the shipping company comes back to you with more favorable rates, or you may have the opportunity to discover new shipping partners that suit your business needs more.
It can be very difficult to end a negotiation, particularly when a past relationship has been established or negotiations have been underway for some time, but it is a valuable skill to hone.
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Compare multiple carriers and costs
This task should be fairly obvious to anyone requiring consistent shipping for their business - Compare, compare, compare.
There are all kinds of factors that play into ocean shipping, from service levels, to preferred routes, to your own budget.
Review each shipping company’s package and pricing structure before settling on a decision, and make sure to choose one that suits your business requirements best.
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Watch out for hidden fees
Read and re-read your contract to ensure that the small print isn’t hiding any hidden fees.
These fees can drive up shipping costs, leaving you blindsided and feeling as though you need to proceed as you have a contract in hand.
Types of hidden fees might include:
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Fuel surcharges
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Prolonged detention accruements
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Accessorial charges
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Deadhead miles
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Drayage fees
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Low sulphur surcharges
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Bunker adjustment factor (BAF) and emergency bunker surcharge
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Currency adjustment factor
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Carrier security fee
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Heavy lift and Out of Gauge fees
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Verified gross mass fee
An effective way to deal with these issues is to ask the shipping company for a detailed cost breakdown. This should help you to piece together where costs are coming from, and make an informed decision on whether you will proceed.
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Build relationships
Consider how you approach your relationship with your new potential freight forwarder. If you can maintain a positive relationship with your shipping partner, it creates trust and consistency that both businesses can appreciate, allowing for:
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Shipment prioritization
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Shipment discounts
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Contract reviews
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Contract renewals
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Other benefits
Alongside the above benefits, it’s more likely you will enjoy a consistent level of customer satisfaction, both from a business perspective, and from a customer perspective.
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Don’t rely on miles to give you the full picture
The number of miles travelled won’t always give you the full picture, with hidden costs that can increase what may seem like a reasonable international journey.
Consider each element of the shipment:
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Where is it going? Is the location remote?
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What kind of cargo container is required?
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Are there any incidents that might affect the journey?
Take these elements into account and discuss the situation openly with your freight forwarder. Once you understand every piece of the puzzle, you can make an informed decision.
WHAT DOES SUSTAINED LOW OCEAN FREIGHT RATES MEAN?
Low freight rates are obviously nice for shippers, especially after the soaring rates of the past couple of years, but what do those low rates mean?
With sustained low rate projections, negotiating freight rates won’t be any less tricky, unfortunately. Carriers will be more eager than ever to make sure they’re getting a fair market value for each shipment as low freight rates cut into their profit margins. This can be a shock to the system when they were receiving record-high profits within the past couple of years.
Low rates mean that carriers are less likely to enter into long-term contracts since those contracts would tie down their rates near current market rates. We’ll likely see more carriers opting to use index-linked contracts to prevent losing out on cash during the (likely small and not sustained) rate spikes coming in the next year. Short-term contracts will be the status quo during 2023’s contract negotiation season.
IN OVER YOUR HEAD NEGOTIATING OCEAN FREIGHT RATES?
You don’t have to go it alone. A trusted 3PL partner like SEKO can help you keep your ocean freight rates in check and your shipments moving smoothly. Contact our team to see how we can help.
Our dedicated team is always transparent when discussing Ocean Freight Forwarding services, so you know exactly where you stand. We are also proud to be one of the top 10 3PL providers, and have a global network of locations across the world, so you can scale your business with SEKO.
