Conference System and Practices in Shipping Companies
The conference system of shipping refers to a formal association of shipping companies for setting freight rates in the shipping network. These conferences were formed with an aim to reduce the intensity of competition in the international shipping industry. The practice of forming shipping conferences has been there for the last 130 years.
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Advantage of Conference System
The main objectives of forming such conferences are price fixing, entering into loyalty contracts, and improving capacity management. The companies in the conference system follow certain terms for service. These companies are involved in the transportation of goods with the help of huge ships that follow particular ocean routes on a regular basis.
The major advantage of the conference system is that the members of these conferences meet regularly and fix the freight rates. The members may discuss and fix a sailing schedule under which each member will get the opportunity to carry goods and earn business.
Other advantages are discussed as follows:
- Restricting the competition: As all the major shipping companies are partners, they do not compete with each other. A written document is signed by all the member liners, which defines the duties and responsibilities of each and every member. If any member violates the rules as established in the agreement, penalty may be imposed on them.
All the members work in association and with discipline for achieving one common goal i.e. to maximise the profits and making sure that all the shipping companies under conference have business in hand. - Stability of rates: When the freight rates are fixed by the members of the conference, the rates are expected to remain at a fixed level for a relatively longer period as against the case when the liners operate individually.
- Protection to weaker lines: When the conference system includes all the liners, the business and revenue is shared equally between them irrespective of the size of the shipping line.
- Lower freight rates: When all the shipping lines operate collectively, they get benefits of the economies of scale.
Disadvantage of Conference System
The disadvantages of the conference system are as follows:
- Monopoly: If any shipping company does not join a conference, other members of the conference may try to throw this company out of business. They may do so by pricing their services below the price that is offered by the liner who does not want to join the conference.
- Limited choice for traders: When all the shipping companies come together and form a conference and fix their price at a certain rate, the traders are left with no choice but to pay the price that is fixed by the conference.
- Predatory practices: Sometimes, the conference members conspire against their customers and rivals. For instance, if a shipper takes the services of a liner outside the conference, the conference may deny the services to the shipper in future. That is why some conferences enter into the contract with the shippers stating that shippers have to use their services and rates.
Under the conference system, some common practices are followed to maintain smooth operations. These practices are as follows:
- Making the agreement that involves setting the fixed, minimum and differential rates. The rates on the commodities may be set by negotiating with each member of conference.
- Controlling the sailings in terms of frequency and regularity
- Pooling together for earning more revenue
- Restricting some routes by choosing a particular direction of sailing
Freight Rate Structure & Calculation of Freight
Freight rate, also called the cost of freight, is the price at which a particular cargo is delivered from one point to another. It is an important factor in deciding the final price of the product sold to a customer. The rate mainly depends on the nature and volume of cargo, the type of vessel, and the distance. Many shipping service providers use dimensional weight, which takes into account the length, width, and the height of a package.
However, owing to the different structures of shipments made by exporters to buyers, the freight rate calculation is a diverse and complicated area of the shipping industry. For precise freight structure and calculation, exporters should be aware of the costs that determine the estimation of freight rate for making effective deals with the cargo carrier.
The common costs that need to be included in the freight rate are as follows:
- Fixed costs: Interest on capital invested in the fleet, depreciation, insurance premium, administrative overheads and expenses on fixed facilities, etc.
- Semi-fixed costs: Staff salaries, maintenance expenses related to running of the transport vehicle, etc.
- Variable costs: Cost of fuel and lubricants, maintenance attributable to a particular trip, damage to the vehicle and the cargo, etc.
However, certain factors make freight cost estimation extremely complicated. These are:
- Freight costs depend on the amount of cargo that needs to be transported.
- Operators often provide services to different markets at different rates. Nevertheless, the use of average cost ceases to have meaning in freight rate calculation.
- Freight rate calculation requires assessing the degree of scope and scale of economies. The data for such assessment may be hard to obtain.
Let us look at a few freight rate structures commonly used by exporters:
Liner Shipping Freight Rate Structure
Until 1970s, the conference system of shipping was used extensively and the conference used to decide the freight rates. However, after the mid-70s, the freight rates are determined on the basis of market pricing techniques. Importance is also given to factors like port and distance along with cargo.
In case of general cargo, the freight rates are based on weight, measurement and value. If the goods measurement is less than 40 cu. ft. /1000kg, they are charged on a cargo weight basis. Any goods above this size are charged with measurement tariff scale. The high value goods are charged on ad-valorem basis.
Tramp Shipping Freight Rate Structure
Pricing in tramp shipping is governed by the supply and demand principle. The freight rates are quoted through brokers in various exchanges of the world. Factors which affect the pricing of freight rate are trade and route adopted, ship specifications etc.
Chartering Practices in Shipping
Shipping can be done by either liner ships or tramps. When a tramp (carrier used in tramp shipping) is shipping some goods, it is said to be in charter. Charterer is the person who hires the tramp. The tramp may be hired as a whole or a particular bulk space may be hired. The charterer and the owner of the ship enter into an agreement called the charter party.
There are three different types of charter party agreements discussed as follows:
Voyage Charter
It is a charter under which the ship owner and the charterer enter into contract for a predetermined voyage. The voyage may be from one port (A) to another (B) or may be for multiple voyages such as from A to B and from B to C. In the charter party (agreement), the quantity to be transported along with the details of the port of loading in one country and the port of discharge in another country are mentioned. The ship owner provides the container to the charterer for loading the goods.
Time Charter
It is a charter party under which the charterer enters into an agreement with the ship owner to use the ship for a particular period of time. However, the agreement also details as to in which territories the ship may be operated. The charterer can take the goods and deliver them in specific territories only.
The ship has to be delivered to the charterer in a good condition and similarly it must also be returned back to the ship owner in a good condition. All the crew has to be maintained by the ship owner. The operating expenses have to be borne by the ship owner. These include insurance, depreciation etc. The running expenses such as fuel, port charges are to be paid by the charterer.
Bare Boat Charter or the Charter by Demise
In this type of charter, the boat or the ship is handed over to the charterer in a good condition for a fixed period of time. The boat has to be returned to the owner in a good condition, and all the expenses i.e. the operating and the running expenses have to be borne by the charterer.
