shipping and freight questions

Correlation between demurrage, detention and freight rates

demurrage, detention and port chargesDemurrage 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..

correlation between freight rates and demurrage

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.

Top 25 container lines - correlation between demurrage and freight

 

Fast forward to 2019, the top 25 container operators in terms of TEU and % of market share are as below.

Top 25 container lines - correlation between demurrage and freight

 

Main difference between 2000 & 2019 = Mergers & Acquisitions

  • Hanjin Shipping (4th largest container operator in 2000) was declared bankrupt
  • Hapag Lloyd & UASC (16th and 17th largest container operators respectively in 2000) merged to become the 6th largest container operator in the world
  • Cosco and China Shipping (7th and 18th largest container operators respectively in 2000) merged to become the 4th largest container operator in the world
  • CMA-CGM took over NOL (including APL – 6th largest container operator in 2000) to become the 3rd largest container operator in the world
  • Maersk 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 world
  • Cosco 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..

Global Shipping Alliances - Shipping and Freight Resource

 

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* :

demurrage and detention
* (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..

demurrage and detention shockNow 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..

 

Conclusion

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 :

  1. Delays due to incorrect documentation
  2. Delays due to late receipt of documents
  3. Delays due to loss of documents
  4. Delays due to customs clearance or cargo inspection
  5. Delays due to release of cargo at destination
  6. Delays 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..

12 thoughts on “Correlation between demurrage, detention and freight rates”

  1. We have been importing for last 10yrs, mostly from China, The last cargo was out of Turkey second shipment from manufacture. Manufacturer used a forwarder from Turkey, in highsight first mistake, Ship arrives in Fremantle WA, shipping company now tells us they haven’t been paid for the sea freight from Turkey. H/L unload and put a hold on that container, it took approximately 10 days for H/L to change paperwork and for me to pay the shipping costs for the second time as we had paid all of our expenses 5 weeks before it even got to the wharf in Turkey.
    That was bad enough but the demurrage on that container in Australia $3,770AU plus a bond of another $3000AU (waiting to see how much I get back) Why do shipping lines give credit to Forwarders everyone else in the business is paid up front. Why penalise the companies that have done everything right. If I had waited for the exporter in Turkey to pay the costs, this container would still have a hold on it.
    When we did the deal with the exporter (manufacture) we requested CIF terms, we find out later that also had not been added hence Turkey forwarder had grabbed that as well.I realise the Insurance would not have cover what had occurred. We now have to get some compensation out of manufacture, one would say good luck with that. The actual shipping cost was just over $1600US.
    Has anyone else run into this problem.

    Reply
  2. I agree with your research that containers need to move faster and more swiftly.
    Why is the counting of free days started by the shipping line from the day of docking of the vessel .
    Eg. If vessel arrives as 11.00pm that day is counted in free days time. Just for the sake of 1 hour.
    And in some ports the containers are moved only after 3-4 days of vessel arrival. And only after 4 days importer is granted the excess to the container to be examined at the designated CFS .
    Eg. Nhava Sheva .(India).
    By the time the goods are accessed and examined your free days are already over and you are charged minimum 3 days of demurrage for noting wrong on importer part or beyond his reach.
    If vessel arrives on Wednesday . Access is available only by Friday / Saturday .being week end you are helpless even if you want to.
    So all matter starts for clearance only by Monday which is 6th day itself .
    According to me shipping line should be flexible enough to provide free days from the day the container is available for access to importer / exporter . And count the free days from that point of time.
    Regards.
    Jinesh

    Reply
  3. I Agree with view on detention n demurrage but would like to add that with shrinking freight level’s and High operations cost escalation there need to be balance on revenue n cost hence these terms are legitimate to keep running business module of shipping.

    Reply
  4. I agree with your call for supporting the shipping lines as it is in the trader’s own interest – generally

    but 10 days demurrage @ 220/day as per your example … there are times and places that the demurrage even exceeds the new build costs of a container. (and then on top still come the port/terminal storage costs)

    That the shipping line wants to discourage delays is fair, but such exhorbitant pricing I find hard to justify

    Reply
  5. How does the demurrage and detention fee come into play when a customer own his/her container? And does shipping companies allow 1 or 2 private containers on their ship?

    Reply
    • Hi Abe, lines charge dem/det only on their containers.. They don’t charge dem/det for shipper own containers.. While there is no limitation or regulation on how many SOCs the lines allow, in some cases where there is demand for containers, it may be good for the line to allow SOCs while in cases where there is overstock situation they would rather use the space for their containers..

  6. When there is delay by shipping line at transhipment port or moving the vessel to another port for unknown operational reason . ,Are shipping line providing any cost benefit to shipper or consignee for the delays.

    Sometimes in projects this delays cost LD by consignee and is very painfull.

    Reply
  7. Indeed, it had direct impact on freight. Its known nowadays, that if more free days granted by shipping carriers, freight will definitely be higher.

    Reply
  8. In my opinion, it is unfair to the consignee and shipper to bear the ridiculous cost.

    Will u pay for the demurrage for May USD200 per day and for Jun u need to pay USD295 per day? Without any notice increment tariff?

    Shipping line is the large company with large income, why need to burden importer and exporter who pay your service?

    Moreover, most of shipping lines customer service also poor.

    But as shipper and consignee, we have to use their service to transport our cargo around the world.

    Reply
  9. Sir may you look also the practice of shipping lines imposing container deposit of their shipping agent at destination. The main problem is the very long period of refund process, considering the fact that the empty container was already been delivered at their designated depo, it took 1 month to 6 months process before their issued a refund check or cash. The amount of deposit is almost a million pesos and their required documents evidencing delivery considering they know that their container was returned at their designated depo.

    Some shipping lines has no container deposit, some took only a week to refund.

    May be you look also on this practice because it involves million of deposit in the Phillipines. For the info, Hanjin declared bankruft and the problem is the unteturned container deposit.

    Hoping to have your study on this. Thank you.

    Reply

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