Category Archives: Maritime Law

When the Japanese registered Hakone Maru set sail for the first time from Japan on August 27, 1968, on its voyage to Oakland, United States it was a giant step in maritime cargo transportation – especially the transportation of standardized box containers. On its maiden voyage, it carried 752 twenty-foot shipping containers (TEUs).

Corrugated steel containers for cargo transport developed by the American entrepreneur Malcolm Maclean in 1955 were already popular by then.

Today, containerization and transport of cargo by container ships are the two most common methods of moving goods between locations. Intermodal containers that can be transported and shifted easily between the three modes of transport – sea, rail, or land account for transporting roughly 85% of the global cargo.

Dedicated shipping containers are used for the transport of general cargo and cargo that is temperature-sensitive.

The International Maritime Organization (IMO) introduced standardization of containers in the late 1960s’ aimed at bringing consistency in the loading, unloading, and transportation of such containers. The container handling equipment used in ports and warehouses, as well as related facilities adapted to these changes as well.

Currently, the most commonly used container sizes are the TEU and the FEU (Forty-foot Equivalent Units). These containers are available as general or temperature-controlled containers, depending on the customer’s needs. Such standardized cargo containers have maintained their general features by and large until recently.

While containers laden with goods criss-cross the oceans on freight vessels and are transported by different modes of land transport to their destinations, the logistics of returning empty containers after unloading their cargo, to their origin, is often not given a thought.

Only when the empty containers are returned and made available at their origin can they be used to fulfill customer demand effectively. Empty containers account for a major part of global container traffic.

An estimated 40% of containers in circulation around the world are said to be empties. From time to time, empty containers clog up the world’s ports and container yards causing container shortages and an increase in freight rates at other locations.

They have to be then moved to those locations where there is demand. The movement of empty containers is a costly affair – monetarily as well as ecologically when CO2 emissions from transport and industries are at an all-time high.

The cost aspect associated with the movement of empty containers is one main reason why there is often an unhealthy lag in moving these. It is an unproductive cost unless suitable return cargo can be found to take in these containers. Is there an economical and environmentally safe way to overcome this situation?

Enter the Foldable Container

Business establishments and freight and transport operators got so used to rigid shipping box containers that foldable containers never came to light until about 2008.

Imagine flat-packing your empty shipping containers and stacking them when not in use or during transportation. Think of the enormous space-saving possibilities when empty containers are stored this way. Space requirements of warehousing and logistics operators will reduce drastically, and so will container handling costs.

Holland Container Innovations (HCI) a company based out of The Netherlands, came out with the concept of foldable containers in 2008. Further to research and trials, in 2013 it developed a foldable or collapsible container that was certified by both the ISO (International Organization for Standardization) and the CSC (Container Safety Convention 1972). This container is called the 4FOLD.

HCI claims an amazing 75% saving in space as four 4FOLD containers, when stacked, take only the space of a single conventional rigid container. This would mean less cost on transportation of empty containers, their storage, and other associated costs. Certain other studies have put savings at 50 – 60% though these figures vary according to different studies.

Besides creating more shipping space, we can see here that it has its own environmental benefits by way of less emissions from transport and Material Handling Equipment (MHE). HCI claims that CO2 emissions are brought down by 37% as a result of using their foldable containers.

Folding and unfolding of such containers take only ten minutes and four folded containers are connected or ‘bundled’ together to form a single unit. These bundled single units are then handled like a single container using normal MHE.

Besides the ISO and CSC certifications, 4FOLD is certified by several other reputed registers such as the Lloyds Register (LR), American Bureau of Shipping (ABS), the Korean Register (KR), etc.

Currently, the company is calling upon organizations, shipping lines, and transporters to use their foldable containers and take advantage of their benefits. HCI won the Global Innovation Award recognizing sustainability instituted by DP World in 2021.

Staxxon is another company that is coming out with foldable containers. This year, the US-based company operating out of New Jersey began trials of their foldable containers collaborating with freight vessels, road transport operators, and railcar companies.

Staxxon’s version of foldable containers is expected to launch in the global market next year (2023). The company claims that foldable containers made by them can be folded and unfolded either manually or with the help of normal MHE, with ease.

How Does a Foldable Container Work?

While the containers from HCI are of the collapsible type, those from Staxxon fold vertically, in the company’s words ‘accordion style’.

To fold an HCI container, an MHE would lift the roof of the container, and then the sides are folded inward. The roof is then lowered gently to rest on the folded sides creating a kind of horizontal flat-pack. Four folded HCI containers are placed on top of one another to form a single standard container size for storage or transportation.

A Staxxon foldable container is folded like an ‘accordion’ vertically. In other words, it is ‘compressed’ from side to side to form a vertical, much flatter unit. Such foldable containers are compatible with the normal ISO-approved TEU or FEU and are strong enough to be placed anywhere on a shipboard stack. Any number of containers from 2 to 5, can be folded and stacked in such a way to form a regular container size for transport or storage.

While the 4FOLD is already in circulation, Staxxon is expected to initially come out with 20’ and 40’ container sizes, with the same payload capabilities.

The tare weight of foldable containers might be slightly on the higher side considering the folding joints and other extra features. Depending on their usability and success we can expect more standard sizes from the manufacturers in the near future.

The Downside of Foldable Containers

Foldable containers are expected to cost more than normal ones. Some shipping experts say that it is also susceptible to damage more easily than its rigid counterparts and therefore its lifespan will be much less.

Considering the millions of conventional shipping containers that are in circulation today, replacing them with the foldable option will be a daunting task. And then, what to do with the containers that have to be replaced?

Currently, the post-pandemic surge in freight cost and non-availability of containers is easing up a bit. Several thousands of empty containers that were lying in European and American ports have started moving and the global imbalance in container placements is said to be getting better, bringing down global freight costs with it.

Reduced freight costs, the increased upfront cost of foldable containers, and questions on their durability are bound to bring hesitancy to the mind of customers.

Innovators and manufacturers of such containers are surely bound to come up with solutions to address these perceived problems. Nevertheless, foldable containers are an exciting option to combat the increasing global space crunch and cut down on environmental pollution.

Video Credits: 4FOLD Containers

Source: Marine Insight

The container shipping industry is characterised by the presence of a multitude of players on global, regional, and local scales. Despite the intense M&A activity that the industry has witnessed since 2000, there still exists healthy competition on almost all trade lanes (a fact attested to by the US FMC, which after conducting a comprehensive investigation into allegations of anti-competitive practices and profiteering by container carriers, finally concluded that the prominent trade lanes were characterised by robust competition).

Over the past two decades, in response to aggressive competition, slim margins, and lack of customer discernment regarding transit times, the industry has become highly commoditised, with relatively little differentiation in service levels provided or, regardless of the prices charged, proportional to that.

Besides, the market is replete with products from multiple carriers, which have little to differentiate between them. Shippers and Exporters have been focussing on freight spending and displaying an increasing propensity to prioritise lower rates over faster transit times, which further perpetuates the trend of commoditisation (due to the reduced commercial viability, Carriers have little incentive to offer shorter times in the absence of demand).

In such a scenario, Shippers are often in a dilemma regarding the choice of container carriers. Apart from obvious factors such as origin and destination ports served and price, there are many other considerations that Shippers must consider while selecting a container carrier.

In this article, we will delve into these factors and understand how they influence the decision of which Carrier to use and the relative importance of each element.

1) Services offered / Ports served

This is perhaps the most elementary criteria, i.e. whether the Carrier serves the origin and destination that the shipper requires. The ideal situation would be one where the Carrier serves both the origin and destination ports (or at least as close as possible); however, given that there are a many major and minor ports dotting the coastlines of various countries and regions, it is generally neither operationally possible nor commercially feasible for a Carrier to serve all such port combinations.

Therefore, if the Carrier doesn’t serve the exact locations required, the Shipper/ Exporter will need to look at other alternative ports that the Carrier does serve and gauge how suitable those ports are for the shipper’s transportation requirements. (in terms of distance from the final destination, hinterland connections, reliability and frequency of such links, transit time from origin port to the final destination and the incremental transit days vis-a-vis the originally requested port, cost, etc.).

Generally speaking, with the steady increase in global port connectivity, shippers are highly likely to find a carrier which will serve their preferred ports of call.

Often, different Carriers call to varying ports in a country, wherefore even if one Carrier is unable to offer a direct service (or at least provide a suitable option that would adequately serve the shippers’ transport requirements), there will most likely be other carriers offering services on the desired port corridors.

This criterion assumes greater importance when calling at second rung or smaller ports because while most major ports are serviced by multiple carriers (thus offering exporters a reasonable range of competing products to evaluate and select from), in the case of second-tier or smaller ports or ports in niche trades, only a minimal number of carriers might offer services, in which case the process of elimination ensures that the choice is almost by default.

2) Freight rates

Freight rates are a prominent factor in deciding on a carrier. While lower freight rates make the Carrier more attractive from the shipper’s perspective, it must be gauged in conjunction with the overall service provided (as determined by all the factors mentioned in this article).

The shipper has to judge whether the service levels are commensurate with the rates quoted, as well as calculate the impact on its supply chain and potential impact on its business and revenues in the unfortunate event of service delivery failures.

Thus, the quantification of the potential risk involved in utilising the services of carriers who offer low rates but possess a poor track record when it comes to customer service will determine whether to avail of the lower rates or go in for an alternate carrier who charges more but has a reputation for providing exemplary service and operational excellence.

Thus, this is a trade-off between savings from lower freight rates and the incremental increase in overall TCO (arising from factors such as excess inventory, contingency planning for delays, risks of stock-outs and obsolescence etc.).

3) Routing and whether Transshipment or Direct

In international shipping, most regions and countries are accessible via more than one route, depending on the length of their coastline and access to oceans, construction of canals etc. This enables the Carriers to provide multiple products catering to a port/ region/ country, i.e. more than one service calling the port/ country but following a different route.

An excellent case illustrating this is the US East Coast trade. Services from Asia to US East Coast ports can take the Westbound route via the Suez Canal or the Eastbound route, traversing the Panama Canal. Note: the Panama Canal option was facilitated only a few years back due to its expansion, which now enables it to accommodate vessels of close to 15,000 TEUs, as opposed to its earlier limit of 5,000 TEU vessels. Carriers, therefore, can offer two distinct products for shippers wishing to export to US East Coast ports, from which the shipper can pick the option that suits his requirements better.

Another example is Asia to Europe trade, where the traditional route traverses the Suez Canal. This involves additional costs in terms of paying Suez Canal transit fees but saves considerable time and money that would otherwise have been spent on the increased bunker, consumed by following the longer route via the Cape of Good Hope, which essentially involves circumnavigating across the entire length of the African continent.

While the Suez Canal route is almost the default route for most services, the Cape of Good Hope route was used by a few Carriers when the Suez Canal was blocked due to the grounding of a mega container vessel last year. Carriers also use the alternative route on the backhaul leg (return journey from Europe to Asia, where volumes and freight rates are far lower than the head haul Asia-Europe leg of the service).

The rationale was that the incremental bunker costs on account of the higher consumption to cover the longer distance were still lower than Suez Canal toll fees. Further, given that there was plenty of excess capacity, additional transit time could be compensated through the infusion of more vessels on the service – thus striking an optimal balance (from the Carrier’s perspective) between costs, margins, transit times and deployment of all available capacity. This option has become popular in a low freight rate environment, where Carriers try to rationalise expenses as much as possible.

Shippers must carefully evaluate routing options in detail, as the distances involved, rates, ocean transit times, and schedule reliability will differ for each route.

The shippers’ route choice will be contingent on factors such as the cargo’s nature and value,  the urgency of shipment, onward connections, weather conditions, geo-political environment etc.

 4) Frequency of services 

The frequency of services, along with the scheduled transit times, determines the average transportation time and when the cargo will reach its destination (and, after that, be able to generate revenue by being sold as a finished product or being processed into the final product). Frequency determines the shippers’ backup options if sailing is missed or when the cargo is rolled over onto the next vessel.

The nature of the Container shipping industry is such that on most major trade lanes, shipping services are offered weekly. However, in the case of smaller trades, the frequency might be lesser, which will lengthen the time required for the product to reach its ultimate destination.

 Bigger carriers with relatively larger fleets can deploy more vessels and thus offer more frequent services, while smaller carriers are hampered by their smaller fleet sizes.

5) Customer service 

Following the adage of price and quality being co-related, a carrier’s level of customer is an essential factor in selecting a transport partner.

Given the number of pitfalls and bottlenecks in international trade, numerous things could go wrong. If the cargo is in transit, then the shipper is almost entirely reliant on the Carrier for regular updates and daily status reports, as well as the actual safe and timely delivery of the cargo.

Suppose the Carrier has a solid and well-trained customer service team backed by sophisticated systems and supply chain management platforms. In that case, the shipper can, to a great extent, be assured of timely updates, cargo visibility and security, proactive support to ensure timely cargo delivery and cooperation from the Carrier.

Given today’s business reliance on JIT and that most companies operate their supply chain with little or no buffers, the value of these intangibles to any business is far greater than would be evident to a casual observer.

This is why carriers increasingly invest in boosting their internal customer service departments whilst outsourcing or offshoring routine documentation tasks.

The shippers’ decision is made easier if the Carrier has a track record of providing good customer service and is proactive in handling customer issues.

6) MQC schemes and Rebates

This factor assumes greater importance, especially for bigger shippers, who control considerable volumes and hence are considered to possess the prime potential for carriers. To gain the sizeable volumes over a more extended period and ensure a regular flow of cargo and revenue, Carriers often offer lower rates in return for a particular minimum quantity commitment (MQC). The rates typically depend on the quantity committed; the higher the volumes committed, the lower the rates.

Rebates are offered to shippers to incentivise them to ship more cargo with the Carrier. Rebates are based on slabs (of containers) and corresponding amounts offered as rebates. The rebates are generally per TEU and depend on the annual volume contracted to the Carrier.

The difference between MQC-linked lower rates and Rebates is that the former are guaranteed rates offered upfront to the shipper and recorded in the contractual agreement between the shipper and the Carrier. The latter is determined by the quantity/ number of containers the shipper ships in that particular year (or the contract duration period). The rebate amount and applicable pay-outs are determined after the contract is over.

More prominent shippers can save considerable amounts from their transport costs by leveraging their volumes to negotiate lower rates and sizeable rebates.

7) Transit Times

While the transit times factor has been rendered somewhat secondary by the phenomenon of commoditisation, there still exist certain situations where transit times are deemed essential.

When it is high-value reefer cargo, the shipper would want the shipment to reach the destination as fast as possible so that he can sell it more quickly, earn revenue and realise his dues earlier, and ensure high turnover. Also, the reduced turn times decrease the risk of damage, pilferage, etc.

Likewise, as happens with fast-moving or time-sensitive goods, such as high fashion clothing and garments or seasonal clothing, their shelf life is relatively short, and it is imperative that the cargo arrives in time and as planned, failing which the shipper could potentially be facing lower sales and revenue losses, besides a reduction in margins.

Companies have recently attempted to balance the demand for commoditised services with the need for premium services by adding a certain number of premium services, guaranteeing faster turn times. These services are offered on high-volume corridors to be utilised by shippers of high-value or time-sensitive cargo.

This typically happens in North-South trades (NAM-SAM or Australia) or Transpacific. The vessels used for the premium/ faster services are usually smaller than the average size of all ships plying that particular trade.

There usually exists an inverse correlation between transit times and freight rates. Carriers with a slower service often offer a lower rate to entice shippers to book with them, while those offering faster services charge a premium. The commoditisation of the container shipping industry means that the premium commanded for faster services has been steadily declining (as shippers prioritise cost savings over faster lead times) and is modest at best. However, it still exists, leaving the shipper to evaluate whether the monetary benefit of getting the cargo shipped faster is worth more than the incremental freight costs.

8) Historical schedule reliability levels

Sailing schedule reliability is the primary driver of overall supply chain reliability. Given the international nature and inherent complexity in the shipping industry, as also the numerous extraneous and non-controllable factors that can adversely impact sailing schedules, carriers always make it a point to highlight that the transit times in published sailing schedules are indicative/ tentative and subject to change without prior notice.

Supply chain disruptions can drive up not just freight rates but the overall TCO as well, as was seen in the post-covid pandemic period when the widespread disruptions led to an unprecedented spike in freight rates.

The implications for the exporter are that their supply chains, and consequently their business, will suffer if carriers’ schedule reliability displays extreme variability or if transit times are prolonged to the point of being unpredictable – which will render supply chain planning extremely difficult.

It is therefore essential for shippers to refer to historical schedule reliability levels for each Carrier before selection (though this can serve only as an indicator for reference, and there is by no means any guarantee that current or future schedule reliability will be similar to historical schedule reliability).

Data related to aggregate carrier-wise schedule reliability for each trade lane can be obtained from market research and market intelligence agencies which offer such services.

9) Availability of Equipment

After vessels, the biggest CAPEX item for Carriers is containers, which they must procure in varying sizes and types to cater to diverse business requirements. The most common size of the container is the 40′, followed by the 20′ and then the other types (such as 45′). In terms of container type, the most common type is the Dry container, followed by the Reefer container, and then particular equipment types such as flat racks, open tops, tank containers etc.

Carriers should ensure that their container equipment pool comprises the right mix of container types and sizes, designed to optimally serve the trades they cater to and product verticals they focus on.

Larger carriers have the money to buy more containers of varying dimensions and hence are at an advantage vis-a-vis smaller competitors.

From the exporter’s perspective, this translates into ready availability of equipment, i.e. whether the equipment will be available when his cargo is prepared and available for export. By possessing a bigger equipment pool, bigger carriers are better placed to allocate equipment immediately, while smaller carriers might sometimes not have the equipment.

On busy trade lanes, most carriers have adequate equipment supplies. However, on secondary or niche trades or equipment deficit locations, the bigger carriers are more likely to have the required container types readily available. The exporter will be compelled to choose that Carrier. This factor is significant when the shipment is reefer, out of gauge, or project cargo.

10) Environmental concerns

The growing focus on the environmental impact of shipping and the concerted efforts to reduce greenhouse gas emissions that the shipping industry accounts for is gaining increasing weightage in the selection criteria that shippers use to evaluate and rank carriers.

Shippers have increasingly preferred Carriers who have demonstrated a strong commitment to protecting the environment and reducing emissions. This is partly driven by end-consumer preferences for products and services with a low carbon footprint. Ikea and Walmart have stringent selection criteria for carriers.

Many companies are emulating the praiseworthy example of Walmart and Ikea and resorting to similar selection criteria.

11) Long-term relationship / strategic partnership approach

 Due to the global scale of their business, supply chain reliability and long-term stability of transport models are of utmost importance for bigger exporters. To meet these requirements, they need equally strong transport partners who can complement their geographical presence with a worldwide network of services and capacity large enough to accommodate significant volumes. The intent is to develop a symbiotic and mutually beneficial relationship where both parties endeavour to optimise long-term strategic advantages rather than short-term gains.

For this reason,  bigger shippers often prefer to partner with the more prominent carriers and generally enter into multi-year and multi-trade lane contractual relationships.

This factor doesn’t apply to smaller shippers in equal measure because the smaller scale and lower margins restrain smaller shippers from prioritising the reduction in transport cost by opting for the lowest-cost carriers rather than building long-term partnerships.

Source: Marine Insight

Teleportation, one of the favourite subjects of science fiction is still a hypothesis. Until it becomes a reality and logisticians are rendered useless, it takes time and planning to move materials from one location to another.

Normally, goods are moved between a raw materials storage to the manufacturer’s processing facility, from the manufacturer’s warehouse to a customer, or from the customer back to the supplier, known as reverse logistics.

The time taken for goods or services to move from their origin to a destination is called lead time. Logistics lead times are critical to any business activity – be it the delivery of goods or services. It is one of the most important factors of inventory control.

Typically, in goods warehousing and logistics, it is the elapsed time between the placement of a purchase order by a customer and receipt of goods according to the purchase order, at the customer’s warehouse or the preferred location. It may also be viewed as the total time taken for the customer’s order to be fulfilled by the supplier.

It is not just the movement of materials that are affected by lead times. Intangible services have lead times too. It could be from the date of agreement to deliver a service to a customer, to when it is finally delivered to the customer for his use – ready for implementation at his preferred location.

The time or gap between the two, which is the service lead time, is the time taken to process and deliver the services according to what is agreed between the customer and the supplier.

In short, lead time is the fulfilment time. Here let us take a look at lead times related to goods or materials.

Lead time is critical to all businesses for planning their activities and for ensuring customer satisfaction. Most companies aim to achieve shorter lead times to streamline their operations.

In the event of an out-of-stock situation, this can be helpful as goods are received within a short period and an extended stock-out is avoided.

Shorter lead times mean that a large stock holding can be avoided by the business as stocks meant for processing or resale are received within a short period. Lesser volumes of stocks held mean less capital tied up. This ‘extra cash’ that becomes available to the organization can be used for other purposes within the business.

Lesser stocks mean fewer space requirements as well as labour, that would otherwise be required to handle larger quantities of stocks.

Generally, organizations that measure lead time break it down into the following components:

Purchase order processing time

This is the time it takes for the customer to generate a purchase order and dispatch it to the supplier, either electronically or by mail.

Goods processing time

Time taken by the supplier to process the customer’s purchase order and keep the goods ready for pickup and dispatch by a freight forwarder or by the supplier’s logistics section is called the goods processing time.

Transit time – including the period of pre-transit storage, inspection, etc.

It is the time taken for the cargo to move from point A to point B. It could be the supplier warehouse to the customer’s premises. It includes time on pre-transit storage, any inspections carried out by the relevant authorities, and the sailing time by a freight carrier.

Some organizations take only the sailing time as the transit time.

Clearance time

This is the time taken by the appointed clearing agent to get the cargo cleared by the customs at the destination port, after inspection and payment of all customs duties, taxes, and surcharges.

Transportation & Delivery

Following payment of all dues and customs clearance, the goods are moved from the port premises to the customer’s warehouse or the preferred location.

Transportation by sea is the most common method of moving bulk as well as Less-than Container Load (LCL) shipments between locations, especially in international trade. Typically, ocean freight invoices are issued by shipping lines to their customers for transporting cargo. It may also be issued by an agent on behalf of the shipping company.

Besides the ocean freight charges, an ocean freight invoice would usually include all other related costs such as goods collection charges, cost of road or rail transport, and the various other charges connected with transporting goods by sea.

Especially when a shipment is multi-modal and the agreement is door-to-door, it would include charges for collection and transport, labour charges for handling the goods, and any other charges that are incurred during the course of its movement from the customer’s premises to the port of origin. It may also include charges incurred after the container is discharged from the vessel till it reaches its final destination.

Some common charges found in a freight quotation are Terminal Handling Charges (THC), Inland transport and handling charges, Bunker Adjustment Factor (BAF), Currency Adjustment Factor (CAF), Bill of Lading fees, etc.

Ocean Freight and Incoterms®

It is not always necessary for a freight quotation or freight invoice to include such related charges. It would to a large extent depend on the Incoterms® agreed between the seller and buyer. A door-to-door transport agreement between buyer and seller would include all the above charges.

Incoterms® are trading terms published by the International Chamber of Commerce (ICC), meant to ease communication among global trading parties and to fix the responsibilities of each of them – the seller, the transport agent, and the buyer. It is therefore recognized by all global trading bodies, the government, and the law.

Freight companies normally deal with the seller of the goods or the party that books the transport of a consignment. It is from them that they get all the booking and shipping instructions. The ocean freight payment is also arranged by them. But there are also instances when the freight company is paid ocean freight charges by the buyer or the party that receives the goods.

In a different scenario, a company that books a consignment by sea freight may pay the freight company charges related to transporting the goods to the port, repacking – if required, inspection and customs charges, Terminal Handling Charges (THC), documentation charges, or any other dues incurred until the cargo is put on board the vessel. Ocean freight charges may be paid by the company that receives the cargo. It would also bear the cost of inland transport and other charges at the destination port.

A contract of sale must therefore state clearly all the terms and conditions of the sale using the correct Incoterms®.

Ocean Freight Base Rates

Freight and shipping companies have base rates that are used in the calculation of ocean freight charges. Typically, the ocean freight charge for a Full Container Load (FCL) of cargo will be based on the size of the container, that is, 20’ or 40’ or 45’, and its type – refrigerated, non-refrigerated, etc.

An LCL consignment will be charged according to its weight or volume, whichever is higher. The weight in tons or volume in cubic meters (CBM) is multiplied by an LCL base rate that is charged by the freight company. CBM is the volume of an object that is 1 meter in width, 1 meter in length, and 1 meter in height.

Also known as the volumetric weight, it is the space taken up by the packed cargo inside a container or on the transport. LCL ocean freight charges are based on the gross dimensions or weight. This is the total dimensions or weight of the consignment including its packing, palletization, etc.

In the case of LCL cargoes, when the weight of cargo exceeds 1000 kilograms (1 ton), then the exact weight is used to calculate freight charges.

The reason why ocean freight is charged either by weight or its dimensions is because of the proverbial ‘kilogram of iron and kilogram of cotton’ difference.

As we know, packed goods need not always be of regular shapes. They may sometimes be cylindrical or of other abnormal shapes. The freight charges of such irregularly shaped cargo are calculated in different ways.

The method of arriving at volumetric weight varies between road, ocean, and air modes of transport. It may vary between different countries or freight operators may have their own method of calculating this. However, the generally accepted factors are as follows:

Road freight: 1 CBM equals 3000 kilograms (3 tons)
Ocean freight: 1 CBM equals 1000 kilograms (1 ton)
Freight by air: 1 CBM equals 6000 kilograms (6 tons)

Based on the above, a freight operator will charge his customer for LCL shipments either by gross weight or volumetric weight, whichever is higher. This is called the chargeable weight.

Let us take an example here of how the ocean freight charge is calculated for an LCL shipment.

Cargo dimensions: 5 m X 5 m X 5 m
CBM: 125 m³
Gross cargo weight: 300 kilograms (0.3 ton)
Freight rate: USD 60 per CBM or ton
Freight charged: 125 m³ X USD 60 = USD 7500

The CBM factor used for ocean freight is 1 CBM = 1 ton. In this example, the actual ton weight is less than the volumetric weight (CBM) and hence, the ocean freight charges are calculated based on the CBM.

A table showing the general dimensions and volumes accommodated by the different types and sizes of containers is given below:

Related Reading – TEU in Shipping – Everything You Wanted to Know

This brings us to the question of how many CBMs does a normal pallet hold? While the exact CBM will depend on the height to which a pallet is stacked, generally the CBM of a pallet is taken as 1 m X 1 m X 1 m = 1 CBM.

Most cargo carriers and freight operators have aligned together for their common benefit, these days. Known as shipping alliances, it helps operators to cover and share the global shipping routes as well as stabilize ocean freight rates.

Shipping alliances are helpful to customers as well as they can find better routes and therefore reduce transit times. Customers may sometimes benefit from better rates offered by the members of such shipping alliances.

Source: Marine Insight

Since ancient times, the Mediterranean has been a very important area for transportation and trade, as it links three continents, Europe, Asia and Africa. Container News has demonstrated a list of the five busiest container ports of the Mediterranean, a semi-enclosed sea bordered by over 20 countries.

Below you can find the five top port players of the Mediterranean, based on 2021 container volumes:

Port of Barcelona, Spain – More than 3.5 million TEU in 2021

In the fifth place, we find the Port of Barcelona, ​​which handled 3,531,000 TEU in 2021. The major Spanish port with a history of more than 2,000 years achieved a double-digit percentage growth rate of 19.4% compared to 2020 figures.

Port of Algeciras, Spain – More than 4.7 million TEU in 2021

Another Spanish port follows. The Port of Algeciras is in the fourth place. Although its last year’s container turnover decreased by 6.1%, is still one of the busiest container ports of the Mediterranean. In 2021, Port of Algeciras reported 4,797,000 TEU.

Port of Piraeus, Greece – More than 5.3 million TEU in 2021

The Port of Piraeus in Greece has fallen to third place due to consecutive box volume drops in the last two years. In 2021, the container reduction reached 2.2% with 5,317,000 TEU passing through the COSCO-owned port.

Port of Valencia, Spain – More than 5.6 million TEU in 2021

As we get closer to the top, we find the largest port in Spain, the Port of Valencia. The Port Authority of Valencia (PAV) announced an increase of 3.4% in its container volumes during the last year, compared to 2020 numbers. In particular Valenciaport handled 5,614,000 TEU in 2021.

Port of Tanger Med, Morocco – More than 7 million TEU in 2021

The port of Tanger Med is by far the busiest container port in the Mediterranean with 7,173,870 TEU in 2021. The African port has achieved to record the highest percentage of container growth among the rest of the ports in the list, seeing its last year’s box volumes increase by 24%.

Source: Container News

Currently, the container capacity of 5 of the world’s major players in container transport is estimated at 16.4 million TEUs (Twenty Equivalent Units). More than 90% of global cargo is transported by multimodal containers.

Considering the number of containers that are in circulation around the world, to transport about 2 billion tons of cargo annually, how does one keep track of their whereabouts? How are containers identified, tracked, and accounted for?

Unique identifiers known as container number or container identification number is assigned to every container that is used for the transport and storage of cargo. It is used as the reference for all commercial and legal purposes as far as the container or consignment is concerned.

These numbers assigned by the ISO (International Standards Organization) through BIC (Bureau International des Containers), under ISO 6346:1995 E, are made up of 4 letters followed by 7 numbers. Each container number is unique. Some examples of container numbers are:

• MSCU5285725
• HLXU2008419
• TLLU5146210

The ISO and BIC

The ISO is an internationally recognized non-governmental body based in Geneva, Switzerland for setting international standards. BIC, on the other hand, has been appointed by the ISO as the global container prefix registry.

The BIC is a non-profit organization that aims to promote safety and security in the field of container transport. The BIC also maintains a container facility code registry that identifies each facility that is involved in the container industry, on a geographical basis.

The unique alpha-numeric container number is mainly displayed on the top right part of the container door along with other details. It may also appear on all sides of the container except the base so that MHE (Material Handling Equipment) operators can identify the container easily.

The container number appears on the container in other places too.

The CSC Plate and the Combined Data Plate

It is mandatory for each container to have the CSC (Convention for Safe Containers) plate on it. This is a small, rectangular, non-corrosive, and fire-proof plate fixed on the door of a container. It shows technical data of the container and details of tests it has undergone, under the heading ‘CSC Safety Approval’ in bold.

Some containers may have a Combined Data Plate that includes several other data regarding the container, besides the details of the CSC plate. Some of the details shown on a Combined Data Plate are:

• Country of approval
• Approval certificate number
• Manufacturer’s name and address
• Container model
• Container number
• Date of manufacture
• Maximum gross weight
• Racking test details
• Pest control treatment on timber components of the container
• Periodic container examination scheme number

A convention for container safety was held in 1972, jointly by the UN (United Nations) and the IMO (International Maritime Organization). This came to be known as the Convention for Safe Containers (1972).

The CSC 1972 sets forth test procedures for establishing the strength of containers that is necessary for the safety of humans operating such equipment as well as for the durability of the containers.

Breaking up a Container Number

The methodology followed by BIC for framing a container number is as follows:

• The first three letters: Code to show the owner of the container (Owner code)
• The fourth letter: Identifies the equipment (Product group code) *
• The first 6 numbers: A unique serial number given by the owner of the container
• The last number: Check digit **

* The equipment identifier (fourth letter in the container number) can be one of these letters in the capital case:

• U: All freight containers
• J: Equipment related to freight containers that may be detached
• Z: Trailers or chassis

** The check digit is a method of validating the owner code (first three letters) and serial number (first six numbers). This is normally shown within a box to separate it from the serial number.

The container number MSCU5285725 may be broken up thus:

The owner code of the container number is approved by the BIC after verification.

In the example of container numbers given above, MSCU is of Mediterranean Shipping Company (MSC), HLXU of Hapag Lloyd, and TLLU of Triton Containers International Limited.

Most containers display the distinct logo of the company that owns the container.

Size and Type Code

Having examined the container number, now, what is the 4-lettered code that appears right underneath it on the container door? This code called the Size and Type Code may consist of letters or numbers and it contains the dimensional information of the container.

The first character shows the container’s length while the second shows its height. The last two characters denote the type of container; whether a general-purpose dry container, refrigerated container, open-top, platform, or tank container.

The BIC-issued types and sizes chart used for the Size and Type codes is shown here for reference:

Other Operational Markings

A container will also have other operational markings on it. These include:

• Gross weight: The maximum weight of the loaded container
• Tare weight: The weight of the empty container
• Net weight: Gross weight minus the Tare weight (also called the Payload)
• Max Cargo Vol: The maximum cargo volume that can be carried in the container

The identification system using container numbers is used internationally for tracking containers as well as in shipping documents such as the bill of lading, packing list, invoice, etc. A consignment may be a single container or it may consist of several containers. All the container numbers are shown on the bill of lading while each container will have its separate packing list.

The container numbers are used in communication between the seller, buyer, transporter, government agencies, or any other party who may be part of the transaction. Most cargo tracking apps use the container number to track and trace the current location of their cargo.

Source: Marine Insight

Continuing from our previous article where we covered the primary trends expected to drive the Container Shipping industry in 2022, we will in this article delve into certain other factors that will undeniably exert considerable influence on the industry, over the course of the next 2-3 years.

Some of these are fundamental in nature and portend an industry-wide change in mindset and way of working, leaving a long term mark.

1) Increased regulatory scrutiny

One of the regulatory threat factors stemming from concerns regarding ostensible market concentration and allegations of profiteering in the midst of the global supply chain crisis is the increased scrutiny that the industry, major players therein and container carrier associations face from various governments and statutory anti-monopoly bodies.

The background is that the Container Shipping industry has witnessed a number of mergers, acquisitions and takeovers since the early 2000s. Some of the more notable ones involving global carriers include Maersk taking over SeaLand, P&O and Hamburg Sud, CMA CGM acquiring APL, Hapag Lloyd taking over UASC, and COSCO buying out OOCL and the three main Japanese Carriers (NYK, MOL and K-Line) merging to form ONE.

The resultant decline in the number of market participants prima facie creates the impression that competition is reducing and that the container shipping industry is becoming highly concentrated.

Additionally, the period since Covid has been characterized by unprecedented levels of supply chain disruptions, with congestion plaguing all major ports across the globe and shippers paying rates 10 times the historical average, while still receiving markedly deteriorated service levels.

Carriers however have made record profits in 2020 and 2021, in part due to the congestion and capacity and equipment shortages, prompting other stakeholders to allege causation between the disruptions and Carrier profitability, abetted by collusion.

While not a lot of tangible evidence has been presented in support of these claims, the magnitude of supply chain issues, the resultant increase in end-user prices and the overall inflationary impact have created sufficient public pressure to compel numerous Governments to launch preliminary investigations into what Shippers construe to be malpractices.

It is in this context that the US Government and FMC have been looking into importers’ complaints about excessive Detention and Demurrage charges, as well as acting upon exporter’s allegations of Carriers not allocating adequate equipment for American exports on the backhaul legs.

The Chinese government has over the last 2 years looked into Exporters’ complaints regarding excessive quantum of surcharges, even going to the extent of asking Carriers to share their costs and comparing them with the surcharges levied and collected. While no conclusive case of profiteering was made out, the pressure made Carriers agree to put on hold further increases in handling and other local charges.

Given the ground realities, the probability of Carriers being found guilty of price-fixing seems low; however, in the face of increased scrutiny, Carriers have deemed it expedient to voluntarily put on hold and increase in spot rates and surcharges.

This increased scrutiny will likely be a persistent trend over the next 2 years until the markets are correct and a semblance of parity is restored between Carriers and Shippers.

2) Mergers and Acquisitions

As explained in the above point, Mergers and Acquisitions have been the defining trend in the Container Shipping industry over the past 2 decades, so much so that the competitive landscape has undergone a sea change since 2000.

M&A activity over the years has focused on both global level players as well as niche market players. Examples of the former include Maersk’s takeover of SeaLand, P&O and Hamburg Sud, CMA CGM taking over NOL/ APL, Hapag Lloyd acquiring UASC and CSAV, ONE formed through the merger of the 3 Japanese containers carriers, while the latter category includes Hapag Lloyd’s recent acquisition of DAL (a strong player in the African trades).

With Carriers flush with cash from the record level profits in 2020 and 2021, there is growing cognizance of the necessity of strategically utilising their windfall gains to strengthen their competitive position, with continual scouring for potential acquisition candidates. The numerous acquisitions over the years have meant that there are only a few companies left who could be deemed valuable candidates (the top ones are too big to be brought out while the smaller ones are not attractive enough), therefore prompting Carriers to be strategic in their choice of targets.

It is however exceedingly probable that the bigger Carriers will continue their takeover spree and grab any companies of strategic or tactical value, even if it means paying a significant premium over current valuations (far beyond what would be considered a fair price, in normal circumstances).

Further, this acquisition activity is not restricted to within the industry but stretches upstream and downstream to include players active in other segments of the supply chain.

3) Customer Centricity

While container liner schedule reliability has never been exceptionally good, it is often explained as a factor of the low freight rate environment that Carriers operate in (which compels Carriers to pare costs even at the expense of schedule integrity and service levels). Shippers have viewed this as a trade-off between rates and service (lower rates equate to low reliability).

Since 2020 however, incessant supply chain disruptions have driven freight rates upwards, while simultaneously causing service levels to plummet to abysmal depths.

This is created disaffection amongst shippers and end consumers, increasing their propensity to change Carriers and prioritise short term benefits over long term partnerships.

Recognising this, Carriers are increasing focusing on inculcating a customer-centric mindset to better fulfil the needs of customers and improve customer service levels.

Customer centricity involves working on the holistic customer experience, by identifying customers’ expressed and unexpressed needs, designing innovative solutions, therefore, partnering with customers to help them increase their business and using technology to gain actionable insights into the market and customers.

In the long run, this approach will benefit customers and pave the way for robust working relationships.

4) Rise in Integrated Logistics Service Providers

A phenomenon that has been gaining traction over the past few years has been the rise of the Integrated Logistics Service Providers (ILSP). This essentially refers to Container Carriers or Port Operators making concerted efforts to diversify their product portfolio, in their quest to build last-mile delivery capabilities and provide end-to-end service, thus evolving from pure-play transport providers or terminal owners into entities offering the entire gamut of transport and supply chain-related services.

In an effort to mitigate risks from exposure to their primary business segment and also to offer a one-stop solution to consumers, Container Carriers have been increasingly scaling up their logistics competencies. The preferred route seems to be inorganic growth, through the takeover of established players in target segments, which enables Carriers to rapidly scale up and acquire a ready customer base.

All the top Container Carriers have been active in the M&A market, to some extent at least. While Carriers like Maersk have always had a freight forwarding arm and have now focused on targeted acquisitions in key markets, other Carriers have brought out global freight forwarders (CMA CGM acquiring Ceva Logistics or MSC acquiring Bollore Logistics). Of particular interest are players operating in specialized segments, whose takeover enables the acquirer to immediately gain expertise.

Global Port Operators such as DP World have also jumped onto the bandwagon, by acquiring logistics companies and feeder operators, thus building a presence in all the major components of the supply chain, right from inland transport and logistics to shipping to port facilities – thereby providing last-mile delivery services in the real sense of the word.

As the number of obvious and feasible takeover candidates in the Container Shipping industry is dwindling, and also because companies now prefer diversifying their business exposure across various sub-segments, Carriers are increasingly focused on upstream and downstream integration, in the expectation that offering a complete transport solution to customers will increase margins and commercial flexibility, facilitate positioning to a wider customer base, and create stable customer pool.

This trend is only expected to accelerate in the coming years, with a number of global and regional players allocating sizeable reserves for M&A, besides also making public statements of intent about their vision of metamorphosing into ILSPs.

5) High Costs for Carriers, passed on to customers

Carriers anticipate a steep increase in costs in the forthcoming months, which they will try to pass on to customers.

These increased costs are primarily on account of the below:

a) Bunker costs: With the need to comply with regulations lowering the permissible Sulphur content in bunker fuel, Carriers will need to select from a range of options available to ensure adherence and to avoid the risk of penalties and punitive action, besides the inevitable negative publicity in the event of their failure to do so.

Carriers have recourse to 3 alternatives to ensure compliance, each involving considerable costs and with their own associated merits and demerits.

These alternatives are explained below:

i) Installing scrubbers: Scrubbers (also known as Exhaust Gas Cleaning Systems) remove polluting effluents from bunker fuel, which lets the Carrier continue using the existing quality of the bunker. Though ensuring lower bunker costs, it will involve heavy upfront CAPEX required to install the scrubber.

S&P Global has estimated the cost of installing scrubbers between USD 1 to 5 million, depending on the vessel type and size.

Besides this direct outlay, other indirect expenses and opportunity costs include the lost revenue while the vessel is being retrofitted (which can be significant in the current high freight rate environment) and the slots lost due to additional space required for the scrubber (once again a substantial amount due to the current freight rates).

The other risk factor is that a few ports across the world do not permit vessels fitted with open-loop scrubbers to call at the port, to prevent the discharge of scrubber wash water in their territorial and port water.

ii) Using LSFO bunker: This involves purchasing and using a bunker that has already been refined to reduce the sulphur content to comply with the mandated requirements. This option has the advantage of being the most straightforward one, where the Carrier can use the bunker directly, without having to do anything else. Since the bunker is already compliant, there is no need to rigorously monitor discharges for Sulphur content.
Other advantages include the fact that the Carriers do not have to remove the vessel from active service for retrofitting, so the vessel can continue to generate revenue.

No expensive modifications are required to the vessel’s design or structure and the carrying capacity remains the same.

Disadvantages include an immediate impact on OPEX, due to the act that LSFO is much more expensive than normal fuel. Also, over the recent months, the price spread between LSFO and HFO/ Normal fuel has been increasing, implying that Carriers opting for LSFP will see significant cash outflows toward their bunker bills.

Availability of LSFO has also been flagged as a potential risk factor, since it might not be as readily available at common bunker locations, or not in the quantities required.

iii) Alternate fuels: the third option includes the use of alternate fuel types such as LNG, which poses its own set of challenges. Primary amongst these is the need to alter the vessel structure and engine as appropriate to enable it to run on LNG, as well as the availability of LNG.

Most Carriers are using this as a backup option, and newbuilds being commissioned recently are often touted as being equipped with dual-fuel technology, which permits the vessel to operate on LNG as well as another fuel type, thereby offering the Carrier operational flexibility.

b) High charter rates: In the present market, where supply is scarce, vessels command hefty premiums, causing charter rates to shoot up to 2 to 3 times their average historical rates. The demand is so strong and rates so elevated that Carriers are signing up charters for extremely high rates and for far longer periods than before. An indication of the overheated state of the market is provided by the fact that Carriers are willing to charter just about any seaworthy vessel available in the market and even sign up vessels whose current charters are valid for almost a year more.
All accounts indicate that the current market is a seller’s market, with anecdotal reports mentioning Carriers having to bid for tonnage.

To take an example, Alphaliner recently reported that ONE had chartered two 8,000 TEU vessels at $65,000 per day each, for a period of three years.

Even Carriers who have historically had a policy of chartering vessels rather than buying (to conserve cash flows and ensure operational flexibility) have been compelled to pay exorbitant premiums to buy vessels – simply to ensure they control the space required to offer services.
All these factors will inevitably cascade down to the cost base of Carriers, who will raise average freight rates, increasing the probability of higher freight rates for a longer period.

c) High contract rates: While Carriers have typically balanced spot bookings with long term contractual cargo, since the beginning of the current bull run, Carriers have attempted to capitalize on the situation by maximizing their spot market bookings at higher rates. While rates are still fairly high, some Carriers are now adopting a comparatively nuanced approach, keeping long-term profitability in mind, and signing up long term agreements with higher than average contractual rates (which though lesser than the current spot market rates, are still far higher than the average historical contractual rates).

Carriers have also pushed for multi-year contracts, thus locking up customers at those rate levels for a longer period.

In this manner, Carriers have tried to neutralize the revenue impact in case of the eventual cooling of spot market rates and effectively ensured relatively high revenues, over the next few years.
Shippers will feel the impact in the form of higher freight rates vis a vis spot market rates, for the entire duration of the contract.

Source: Marine Insight

In the past two years, since the Covid pandemic upended the entire shipping industry, a common refrain has been the all-pervasive lack of vessels to transport cargo available.

As the unprecedented congestion levels afflicting ports worldwide have absorbed all excess capacity, Container Carriers are desperately hunting for additional tonnage (vessels) to augment their fleets and cater to the demand for carriage of containerised cargo.

The combination of heightened demand and scant supply meant that all available container vessels commanded exceptionally high premiums, to the extent that Carriers were reportedly engaged in bidding wars for just about any available seaworthy vessel available in the charter market.

The inevitable impact was felt in the meteoric rise in charter rates, which (amongst other cost components) cascaded down to shippers in the form of higher freight rates.

Carriers who owned vessels were at a distinct advantage by virtue of their limited exposure to the vagaries of the charter market and high charter rates, besides the fact that owning tonnage meant that they could, at their discretion, deploy their vessels on the most profitable trade lanes, in an attempt to maximise profits in the current overheated freight rate environment.

On the other hand, Carriers who have typically relied on chartered tonnage found themselves scrambling to charter additional vessels and also paying significantly higher rates to ward off aggressive competition bids for renewing existing vessel charters.

Given the tremendous impact that this factor has exercised over the container shipping market, we will in this article, look at the relative merits and demerits of owning or chartering vessels, as well as Carrier strategies when it comes to evaluating whether to own or charter.

Chartering in Container Shipping

Generally speaking, in the shipping industry, charters can be broadly classified into two types, namely time charters and voyage charters. A very rudimentary differentiation between the two would be that while time charters are for a specific period, voyage charters – as the name implies – are for a specific voyage.
Given the nature of the container shipping business, where the whole concept is to provide fixed schedule sailings, on round-trip routes lasting a few days or weeks, where each vessel sails on a pre-decided port rotation and specified transit days, charters agreements in container shipping are almost inevitably time charters.

Container Carriers typically charter vessels for multi-year periods and thereafter plan their networks around this.

An interesting fact is that in the current market, which is heavily loaded in favour of vessel owners/ charterers, Carriers have been compelled to sign multi-year charter contracts, at rates which are higher than the historical average, thereby assuring vessel owners of a steady source of revenue and profitability over the next few years, thus effectively insulating them against any drop in charter rates should the market experience a downturn.

Container Carrier strategies – Owning versus Chartering

Given the vast number of routes that the international shipping trade is sub-divided into, Container Carriers of necessity have to invest in adequate tonnage to ensure they have a robust and diverse portfolio of products to serve all main (or their target) markets. The enormous costs of purchasing a vessel mean that Carriers find it expedient to develop their fleets using a mix of owned and chartered vessels, thus affording them the operational flexibility and commercial agility of owning vessels, combined with the lower expenditure in case of chartered vessels.

If we analyse the fleet ownership patterns of the top container carriers, it is evident that though every Carriers fleet comprises both owned and chartered vessels, some carriers have a markedly higher proportion of owned vessels while some carriers primarily rely on chartered tonnage.

In the former category are Carriers like Maersk (until recently the world’s largest container carrier, whereafter it was supplanted by MSC), who try to exert greater control over their operations in the bigger trade lanes by owning and deploying larger vessels.

For the secondary and tertiary/ intra- regional trades, where relatively smaller vessels predominate, Maersk relies on a mix of chartered and owned tonnage. At the beginning of 2022, Maersk and its affiliates and subsidiaries operated a fleet of approximately 730 vessels, of which 330 vessels were owned and the rest chartered.

Considering however that Maersk tends to charter smaller vessels, the proportion of owned carrying capacity to chartered carrying capacity is significantly more than the corresponding proportion of vessels.

At the other end of the spectrum are smaller carriers like ZIM Line who have chartered the bulk of their fleet. As per data shared by Statista, as of April 2022, ZIM operates 127 vessels, of which only 8 vessels are owned and 119 vessels are chartered.

This effectively means that ZIM Line’s operations are almost completely reliant on chartered tonnage (though it has in the recent past purchased second-hand vessels, resulting in a slightly increase in the proportion of owned tonnage).

Somewhere in between these two extremes lie most other carriers, such as MSC, CM-CGM, Hapag-Lloyd and ONE which charter more than half of their tonnage but also have invested considerable amounts in purchasing vessels (especially in recent years, where returns are high and chartering isn’t a feasible option, given that there are no vessels available in the market).

Of these remaining Carriers, MSC – the present largest container carrier – operates around 650 vessels, of which one-third in capacity was owned and the remaining two-thirds were on long term charters.

The choice of what is an appropriate mix depends on the Carriers size and scale, corporate objectives and growth strategy, financial wherewithal, and access to capital to finance the procurement of newbuilds.

Prior to Covid, smaller Carriers with weak balance sheets and modest cash flows attempted to monetise their assets by selling owned vessels to Ship Charterers (companies like Seaspan, Costamare, Global Ship Lease and Danaos, whose business involves purchasing and leasing vessels, rather than operating the vessels themselves) and thereafter leasing back the same vessels.

This helped Carriers improve their balance sheets by bolstering their cash flows from the sale of the vessel, while also ensuring that their overall capacity was not diminished.

Owning vessels – when appropriate and advantages and disadvantages

Owning vessels essentially is a trade-off between far higher investment and much greater operational control. Carriers who have the fiscal means and geographical scale have a greater penchant for owning a larger proportion of vessels than do smaller carriers.

The reason is that the owned tonnage enables the Carrier to redeploy vessels and revise schedules at its sole discretion, while also giving it greater control over matters like retrofitting or redesigning the vessel to expand carrying capacity or run on alternate fuel types.

Owning tonnage is especially advantageous in a bull market where Carriers would otherwise be compelled to pay exorbitant amounts to charter requisite tonnage, and even then run the risk of operational disruptions if they lose tonnage due to reasons ranging from failure to renew charters/ competitors paying more to secure available tonnage.

The advantages of Owning are:

1) Complete control on decisions regarding the deployment and utilisation of vessels

2) Can customise the design and structure of the vessel – to meet tactical aims and strategic objectives. Examples include ordering vessels with higher reefer carrying capacity of the Carrier intends to ply those vessels on the reefer-heavy South America trades (such as Maersk Line ordering vessels of 7,450 TEU capacity, with 1,700 reefer plugs, which were intended for deployment on the traditionally reefer heavy North-South routes)

3) Can make structural changes as and when required to increase carrying capacity (beneficial in generating incremental revenue when freight rates are high) or use alternate fuels (environment-friendly, regulatory compliance and lower bunker costs)

4) Lower OPEX and better cash flows

5) Maintenance at its discretion, rather than just to adhere to the terms of the charter agreement

6) Continuity in service / can provide uninterrupted and reliable service, which in turn facilitates long-term planning

The disadvantages of Owning are:

1) Higher capital expenditure (and possibly interest burden, if the purchase has been financed via loans or debt)
2) Higher leverage, due to having to finance the purchase of ships (straining the balance sheet)
3) Provisions for depreciation and maintenance
4) Higher Fixed costs – to be incurred even when the markets are down and there is not sufficient cargo (unlike in chartering where the Carrier has the option of returning the vessel)

Chartering vessels – when appropriate and advantages and disadvantages

Normally, smaller carriers or companies foraying into the container shipping business or those introducing new services are the ones who prefer the option of chartering vessels. The most immediate advantage of chartering vessels is that it avoids heavy upfront investment and the waiting times that ordering a new build would involve. This in turn also lowers the risk as the carrier has the flexibility to alter or even cease the service if subsequent developments are not in accordance with their business plans. When markets are stagnant and the demand-supply imbalance is severe, Carriers have the option of returning the chartered vessel (subject of course to clauses relating to minimum lock-in period or financial compensation, as may be incorporated in the charter agreement).

The operational and commercial flexibility thus afforded by chartering vessels can prove invaluable to medium and small-sized companies, who often might not have excess resources and are rigorously focussed on OPEX control and cash flows. Such companies also lack the scale and geographical presence to redeploy the vessel on alternate routes/ trade lanes, wherefore returning the chartered vessel would be the only viable alternative.

The advantages of chartering are:

1) Investment-light strategy, involving minimal CAPEX
2) Vessel can be deployed into service immediately, thus avoiding the lag time involved in the constructing of new vessels (which can range between 2 to 3 years, depending on the size and design, besides the existing order book of the shipyard).
3) Carrier has the option of returning the vessel in case of a downturn in the market,
4) Carrier can avoid straining its balance sheet or excessive leveraging levels – thus improving its financial health
5) Generally (prior to the Covid induced bull run), charter rates have been quite reasonable, and Carriers could get good charter terms.

The disadvantages of chartering are:

1) Lesser operational control over the service/ deployment (that owning the vessel would have otherwise provided)
2) Higher regular cash outflow towards disbursing charter rates
3) Potential disputes regarding maintenance of vessels and defraying miscellaneous expenses
4) Risk of potential disruptions in service, in case charter is not renewed, for whatever reason
5) In case of a bull market, it will be difficult to find appropriate tonnage to charter, leaving the Carriers unable to deploy adequate capacity, resulting in revenue losses and missing the chance of taking advantage of cyclical upturns.

Source: Marine Insight