Why are international maritime freight charges such good value?

International containerised freight transport is a highly competitive business that has been undergoing a decades-long technology and process-driven evolution.

Ocean container shipping is the single most efficient way to move large volumes of goods bar none. Back in 1956, loading of a medium sized break-bulk ship cost US$5.83 per US ton. Loading of the first true container ship, the Ideal-X, in 1956 was US$0.16 per US ton. It was literally 36 times cheaper than the alternative. International general cargo freight rates are much lower now than they were 50 years ago.

Container shipping has massively increased its efficiency and value-for-money since then.

According to the World Shipping Council, if all the containers from an 11,000 TEU ship were loaded onto a train, it would need to be 77 kilometres long. A container can be moved from a factory in Malaysia to Los Angeles – a journey of roughly 14,484 kilometres – in just 16 days. The cost of transporting a small electronic appliance from Asia to the US is about US1.50, a kilo of coffee is US$0.15 and a can of beer is a penny.

International ocean container shipping should be thought of as a comprehensive inter-connected system for the movement of freight. It has undergone incredible innovation. This includes mechanical innovation, such as twist-locks and container specifications; nautical innovation such as increasing the size and optimising the design of container ships and container terminals; and technological innovation such as advanced cargo-management software whether that is aboard the ship or on the shore.

These developments have improved the levels of service and have reduced the cost of sea freight massively over the past 50 years. International sea freight costs are still going down.   According to a Deloitte report commissioned by the Victorian Government, the nominal cost of importing containers by sea (including all terminal handling and access charges) has increased by 6 per cent between 2010 and 2019 and the nominal cost of exporting had increased 13 per cent. In comparison, the Consumer Price Index had increased by 20 per cent. The Deloitte Report was quoted at a Ministerial briefing to the freight industry at Port of Melbourne on 30 January 2020 but not released.

By causing the cost of freight to plummet and by improving the ability of shippers to transport goods over the vast oceans to buyers, containerisation has expanded the range of goods for sale while also causing a huge drop in price of those goods.  The efficiency of international sea-container freight has changed our world for the better.

What is a sea freight rate?

It the amount charged by a carrier (the company that operates a ship) to the shipper (the person that owns the cargo) for the carriage of goods or commodities from one port to another by sea.

What are “ancillary” charges and surcharges?

An “ancillary” charge is a charge that is related to a transaction but is not directly part of what is being bought. So, for instance, places of higher education are in the business of providing education, for which they will charge a fee. They may also provide a variety of student services relating to such services as health, athletics or recreation and may charge ancillary fees to cover the provision of those ancillary services. Basically, it’s an extra fee for an extra service above what has been transacted for. See the “Financial Dictionary” for a definition.

A “surcharge” is also an additional charge to cover some aspect of business that is not directly part of what is being contracted for. So, for instance, if you pay for something with a credit card, you may be charged a surcharge by the retailer who is passing on the cost he or she is being charged by the bank for processing the payment. See the Financial Dictionary for a definition.

Without getting too obsessed with the difference between the two, the key point is that ancillary charges and surcharges are charges that are related to – but are not directly a charge for – whatever it is that is being bought and sold. In the ocean shipping context, the cost of carriage is the price paid and the various other charges are either surcharges and ancillary charges related to the transaction.

Neptune Shipping Agency of the UK discusses such charges here.

What is a “Terminal Handling Charge”?

OK, opinions on the origin of this charge can prove a bit… controversial. Many shippers are convinced it originates from shipping lines because they see it on the shipping line-issued sea freight quotation or invoice. But Terminal Handling Charges actually originate from marine container terminal operators (aka “stevedores”) and it basically covers the cost of loading and unloading containers to / from a ship.

The THC may then be passed on to shippers by the shipping line. As such, it is an ancillary charge as it is ancillary to the cost of providing sea-carriage.

Every port and terminal applies its charges in its own way and each shipping line decides for itself what costs are included in its freight rate and what costs are included in its Terminal Handling Charge.

What is a “Terminal Access Charge”?

A Terminal Access Charge is a charge for access to a container terminal that is levied by a container terminal operator on its land-based shipping customers. These customers are usually trucking or rail companies. For simplicity and readability, we will refer here to “trucking companies” rather than “land-based-transport-operators”. However, what we write here may well apply to rail companies too. Terminal Access Charges are also known by a variety of names such as “infrastructure surcharges”. For simplicity and readability, we refer to these access-related charges as “Terminal Access Charges”.

Is it fair for companies to charge for access to their premises?

The owner of any asset, such as land, is entitled to charge other people for access to its premises. The operator of a private highway charges tolls for road users to access the road. If you, as a road user, want to use the road then you must pay the toll, which is a form of access charge.  Similarly, a container terminal operator is entitled to charge trucking companies a Terminal Access Charge for access to its terminal.

Specifically, is it fair for stevedores to charge trucking companies a Terminal Access Charge?

In commerce, if you benefit from using someone else’s property, then you have to pay to use it. Container terminal operators provide and maintain land transport-related infrastructure such as roads, roundabouts, weighbridges, ramps, parking, holding points, turnaround facilities, rail links and information systems that enable land-based transport operators to manage their assets more efficiently.

Trucking companies simply could not provide services to their customers if this infrastructure had not been provided by container terminal operators.

Stevedores have not previously charged trucking companies for access to their terminal. However, that has now changed with the introduction of Terminal Access Charges.

It is reasonable for container terminal operators to ask trucking companies, which benefit from infrastructure that has been provided for them to use, to pay a financial contribution to the cost and upkeep of that infrastructure.

Does that mean that trucking companies are now customers of container terminal operators?

Yes. The Merriam-Webster dictionary definition of a “customer” is “one that buys a commodity or service”.  To “buy” means to acquire possession of, or the rights to use, goods or services in return for the payment of money.

If a private highway operator allows your car to access its highway on condition that you will provide financial compensation for that access, then you have used a service in return for the payment of money. In that situation you are, by definition, a customer of the private highway operator.

If a container terminal operator allows a truck to access its terminal on condition that the trucking company will provide financial compensation for that access, then the trucking company has used a service in return for the payment of money. In that situation, the trucking company is, by definition, a customer of the container terminal operator.

But shipping companies are also customers of terminals. Shouldn’t shipping companies also pay for truck access?

No, not at all.

A container terminal is the interface between the sea and the land, and it exists for the benefit of both ships and trucks.

Ships enter a terminal via the sea, and they pick up and drop off containers. Stevedores and port authorities have provided dedicated ship-specific infrastructure such as ship-to-shore cranes, wharves, and loading/discharge areas.  This infrastructure has been provided for the benefit of ships. Shipping companies pay to use that infrastructure through stevedoring and wharfage charges.

Trucks enter a terminal via the land, and they pick up and drop off containers.  Stevedores have provided dedicated truck-specific infrastructure such as roads, roundabouts, ramps, parking, weighbridges, turnaround facilities and transport booking systems. This infrastructure and technology has been provided for the benefit of trucks.  Trucking companies pay to use that infrastructure and technology through Terminal Access Charges.

If it is fair for stevedores to charge ships to use ship-related terminal infrastructure, then it is equally fair for stevedores to charge trucks to use truck-related terminal infrastructure.  

Additionally, trucking companies and ocean shipping companies are also both suppliers to the cargo owner.  Both sets of companies incur costs for the services they supply to the cargo owner and they may or may not decide to absorb those costs or to issue a charge. For example, a wharfage charge is incurred by the ocean shipping company and it may decide to absorb the cost or to recover that cost. Correspondingly, a Terminal Access Charge is incurred by the trucking company and it is up to that operator to to decide whether it wants to absorb that cost or recover that cost.

It is unfair to expect shipping companies to subsidise the ordinary business costs of trucking companies merely because they both provide services to cargo owners and, in the course of providing those services, merely because they both use the same supplier.

I seem to recall something about contracts and liability for charges. Doesn’t Incoterms 2020 put liability for costs on shipping companies?

No. The discussion here is about whether stevedore Terminal Access Charges should be charged to the shipping line or to the trucking companies.

Incoterms 2020 is all about allocating liability for costs, along with the transfer of ownership of goods, during the transport of goods from seller to buyer.  Who pays for what in any given transport of goods will depend on the exact situation and particularly, the specific choice of Incoterm.

Generally speaking, a seller will be liable for all costs up to a given specified point. That will vary depending upon which Incoterm is used.  Accordingly, the buyer will then be liable for costs from that point.

The commonly used Incoterms in ocean shipping are “CIP”, “FCA” and “FOB”. 

“CIP” makes liability for costs dependent on the terms of the agreement between the seller and the buyer of goods.  “FCA” puts the liability on the Buyer.  “FOB” means that seller is free of responsibility for goods when the title (and therefore the risk) to goods transfers to the buyer.

Under traditional FOB terms, the responsibility for all costs up to the ship’s rail remains with the supplier or exporter at origin, which explains why the carrier’s Terminal Handling Charges are generally pre-paid.  An exporter selling FOB will be responsible for all costs from the warehouse door to the port, including inland trucking and insurance up to the ship’s rail.  It therefore follows that Terminal Access Charges should be paid by shippers to trucking companies that are engaged to deliver containers to the terminal.

You can find out more about Incoterms 2020 from the International Chamber of Commerce.

Why have stevedores now issued a Terminal Access Charge after years of letting trucks into their terminals either for free or at low cost?

Stevedores in Australia have had to adapt to increased competition, higher rent, and consolidation of shipping lines.  These factors have led to smaller market shares per container terminal operator, increased costs, and lower revenues. State governments and industry associations have also demanded greater efficiencies for transport operators collecting and receiving containers.

Australian container terminal operators have experienced substantial hikes in property-related costs in the lead-up to and following port privatisation.  While there is some level of price monitoring and control over port charges this does not always extend to control over the amount of rent charged to stevedores.

Container terminal operators are also often required by their landlord to invest in infrastructure to improve the efficiency of cargo throughput on the landside.  The result of this investment is intended to directly benefit trucks, with more efficient loading/unloading, less paperwork, less waiting time, and generally lower turnaround times.

Like everyone else, stevedores need to cover their costs, undertake maintenance, invest in the future, and provide a return to their shareholders.

OK.  I’m convinced.  It is all very reasonable to charge trucks for access. So why is the Terminal Access Charge controversial?

Trucking companies previously had terminal access for free (or at low cost) but now they must pay.  No one likes to pay for a service previously provided for free (or at low cost).  Like any other cost that trucking companies incur, a Terminal Access Charge may potentially affect cashflow and profitability. Trucking operators also have concerns both about the price of access (up to about $131 at the time of writing) and the fact that the cost has increased over time.

Container terminal operators have decided to recover the costs of the significant investments made for the benefit of landside transport operators by charging landside transport operators.  

The new Terminal Access Charge is just another cost of doing business.  

All businesses must pay their own costs.  

That’s just a commercial reality.