Extremely high freight prices continue to trouble shippers and forwarders through the first quarter of 2022. The new year has inherited supply and demand uncertainties in the freight market from 2021. Research shows that carriers would continue to use creative pricing strategies through the surcharge model to gain a higher level of stability.
During the peak of the pandemic, surcharges amounted to almost 80% of the total freight prices. This proportion of surcharges might remain, even if prices drop in the near future.
Freight quotes may contain as many as 20 different surcharge additions. Identified by three or four-lettered abbreviations, these surcharges can be quite confusing and complicated to comprehend.
Using examples and current industry trends, Freightify has explained the most commonly seen surcharges that potentially increase the quoted freight prices.
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Feel free to jump directly to the following headers:-
- What are the most levied unavoidable surcharges?
- What surcharges are based on current supply chain demand?
- What other external factors influence surcharges?
- Does the route of cargo affect the surcharges?
- Do liners charge add-ons based on product type and shipper requirement?
- How can forwarders help reduce the surcharge exposure for shippers?
What are the most levied unavoidable surcharges?
Almost all quotations that freight forwarders would have to prepare for their customers will include a combination of the below commonly charged fees. It is imperative for forwarders to understand what influences these surcharges in order to effectively communicate these add-on fees to the shippers.
Bunker Adjustment Factor (BAF)
In simple words, Bunker refers to the fuel that ships carry for their transport operations. This fee is charged for shippers to compensate for the varying fuel prices. The 2020 IMO regulations have also impacted this surcharge drastically. As the DoE's benchmark diesel rate has been increasing for the last eight consecutive weeks, analysts predict that fuel costs as a percentage of revenue can exceed 25%. The BAF is proportionately based on trade factors like routes, fuel efficiency, and ship build. Hence, forwarders should advise their customers on ways to reduce their BAF rates exposure.
Terminal Handling Charges (THC) at Origin and/or Destination
Carriers collect these charges from shippers for terminals' container discharging services. It covers loading, unloading, stacking, storage, and crane usage functions. Different terminals charge different rates. This type of add-on fee cannot be avoided and cannot be bargained.
Customs Clearing Fees
The administrative charges paid to facilitate the import or export of any product can be called customs clearing fees. Paid to the customs authority, this fee could include inspection fees and broker charges. Because legislatures define these fees, they are entirely out of a shipper's control. Forwarders can maintain the correct documentation and use tech-enabled data transfer to manage customs clearing fees.
What surcharges are based on the current supply-chain demand?
Like most economic transactions, heightened demand for trade and shipping results in a few surcharges.
Peak Season Surcharge (PSS)
As the name suggests, this surcharge is levied by shippers during the increased shopping season. Interestingly, the majority of this surcharge is applied to imports from the Asian continent. June to October, just before the Thanksgiving holiday season and the Chinese New Year period, are the regular peak seasons. In 2021, the PSS charge that Maersk imposed was almost $1000 per container for a trade from Asia to Europe.
Equipment Imbalance Surcharge (EIS)
When worldwide shipping demand is imbalanced, containers get piled up at destination ports. Liners would have to reposition their containers and bring them back without any load. To compensate for the cost of replenishing empty containers at ports where they are required, liners may charge around $150 to $500 per container. One of the most prominent examples is the China to US route during the second pandemic wave in 2021. Containers remained at American ports and could not be sent to China for loading.
Unexpected traffic and non-availability of quays lead to congestion similar to rush hours on roadways. This is majorly dependent on external factors like labor shortage, geopolitical situations, or natural calamities. In the recent past, pandemic-induced lockdowns created a lot of congestion at all Chinese ports.
These add-ons cannot be averted; however, forwarders can help reduce these additional costs with smart planning, constant monitoring, and effective networking. Forwarders can help negotiate rate cards or spot rates, plan routes, schedule shipments around the peak season and advise on how to diversify a shipper's supply chain.
What other external factors influence surcharges?
Goods take weeks to be transported. The interim duration when the cargo is loaded and is traveling at sea could be influenced by external factors that may impact the final cost of goods. Liners take a gamble and hedge on the current external environment and impose specific additional surcharges that could cover any calculated risks that may arise.
Currency Adjustment Factor (CAF)
Exchange rates are known to be volatile. They mirror the sentiments of any market. While the US Dollar is the most used currency in the global trade industry, local currency payments could be used. Basically, the CAF was added by foreign shippers to adjust for a possible decline in US dollar value over the course of the transit time. A trend analysis would show that some carriers have charged more than 50% CAF in the past. A freight forwarder would be able to advise how to mitigate this charge with sensible pricing opportunities.
Security (ISPS) Surcharge
ISPS is the abbreviation for International Ship and Port Security. Historically, the United States noticed that their ports were at equal risk after a few terrorism strikes. The cost of improving the security at ports became an essential requirement to facilitate safer trade. The comprehensive set of security measures that the IMO implements at the ports are eventually charged back to liners and shippers.
War Risk or Emergency Risk Surcharge (ERS)
Two weeks ago, Maersk notified its shippers about the war zone that has developed at the Black Sea due to the Ukraine-Russia conflicts. The sanctions imposed and the unsafe environment result in additional insurance premiums that liners take to keep the cargo safe. As an immediate result, the major liner Maersk has imposed an ERS on all future bookings with a flat fee of $1100 per container. Additionally, freight forwarders will have to bear the brunt of unclaimed Russian goods inside containers.
Does the route of the cargo affect surcharges?
One factor influencing the cost of cargo transport through the sea is the route through which the goods are carried. While this will significantly impact the standard freight cost, a few traditional surcharges automatically get applied as the seasons change based on the ship's route. Forwarders can advise their customers during the planning phase, judge the route-based additional costs, and preempt unnecessary charges.
Canal Transit Fees
Canals were built for trade across nations to flow seamlessly. However, the use of these canals adds to the existing costs. Last year the Panama Canal Surcharge (PCC) was revised to $32 per TEU. Recently a Panama Canal Adjustment Factor was implemented, wherein $15 per TEU was imposed. About 12% of the world's cargo that traverses the Suez Canal has to bear this canal surcharge at about $75 per TEU.
Typically applied only during the winter periods as the Winter Surcharge Fee (WSC), this charge comes into effect as the weather changes. During the 2022 winter season, the additional price applied per TEU for any export from the East Coast of South America to Russia is $125. This is to compensate for the extra costs arising from operating in Russia during winter.
Do liners charge add-ons based on product type and shipper requirements?
Liners prefer dealing with standard operational terms that help them capitalize on the economies of scale in their operations. The addition of extra requirements by the shipper or exceptional requests would undoubtedly result in surcharges. As a freight forwarder, it is imperative to understand these surcharges and provide expert advice to customers on where and how they can save on such surcharges.
Surcharges on non-standard packages or weight
Space is money in the shipping world. Hence, liners tend immediately penalize shippers with fees if cargo boxes are not packed in standard dimensions or when these pallets are of irregular size.
Container Cleaning Surcharges
This is charged at the liner's destination or the arrival port. It is imposed on shippers if the container does not meet the minimum cleanliness requirements after unloading all cargo. More often than not, cleaning charges are not required. However, in the case of refrigerated food in reefers, a cleaning charge could be levied for any leakages making packing cargo for both safety and sanitation essential.
How can forwarders help reduce the surcharge exposure for shippers?
Forwarders are solely responsible for the smooth movement of freight across ports on behalf of the shippers or product owners. As such, forwarders are expected to understand all types of freight rates, documentation fees, taxes across countries, and incidental surcharges.
A forwarder can advise and support a shipper through the cumbersome global shipping process from the schedule planning stage to the final shipping, which includes insurance, booking, and packaging. Forwarders are here to provide monetary and operational benefits for shippers by minimizing exposure to surcharges with the right type of documentation, packaging, route planning, and monitoring.