Do you have cargo on board the MV ZIM Kingston?

The MV ZIM Kingston suffered a large fire on the 23 October 2021 when approaching the Strait of Juan de Fuca.  Apparently, the vessel from South Korea suffered damage from a heavy storm and some combustible powder from containers ignited.

 Luckily the fire was eventually brought under control without any loss of life, but it is still unknown the number of containers damaged or the subsequent knock on effects. A number of containers fell overboard and the fire is still smouldering.

 

In times of high freight charges, container shortages and international trade shortages these types of incidents are most unwelcome.  The vessel will not be going anywhere for the foreseeable future or at least until the bad weather recedes but what does it really mean for forwarders? 

 

If your containers are directly involved this would mean the usual claims for damage, delay or loss.  There is a strong possibility where General Average will be declared which will require Cargo Insurance Securities or cash deposits to be placed to retrieve the containers. No doubt this will place unnecessary strain on the forwarder’s relationships in the absence of cargo insurance.

 

Furthermore, the incident will also cause considerable delays on future shipments if the Zim Kingston must be repaired and other vessels requiring repositioning. This is likely to have a disruption to the Holidays trade and delay related claims against forwarders.

 

From an insurance point of view, the most concern will be with the containers responsible for the fire.  Whether you are the exporter from Korea or the booking agent, the carrier will hold them responsible and pursue for what they can. This will be costly especially as it seems the carrier has already identified the persons responsible.

 

If you have any cargo on-board this vessel, it is recommended that you immediately notify your cargo insurers in order to assist with any General Average or damage related matter.  Your liability insurers should be notified in respect to any potential claims against you but especially if any of your containers could been responsible for the fire.

Dive into the Basics of Shipping

Dive into the Basics of Shipping  

We share some of the fundamentals of shipping, like key players, terminology, documentation, incoterms, and how they can affect the shipment & your markup.

The Key Players

Carriers

Freight is moved by ocean carriers and airlines. Carriers are the companies that own the ships, planes, like Maersk MSC CMA CGM ONE  and American Airlines, KLM, Cathay Pacific. They typically don’t arrange the movement of freight beyond the port to port (or airport to airport) segment of the shipment.

Carriers sell bookings on their vessels, typically through third-parties (although they will offer services directly to very large companies). 

NVOCCs

Some non-carriers also sell bookings through a legal arrangement called NVOCC (non-vessel owning common carrier). Non-Vessel Operating Common Carriers (NVOCC) does not own or operate ocean transport vessels. Instead, they make arrangements with ship owners, charterers, or shipping lines for transportation of cargo under their own Bill of Lading known as the House Bill of Lading (HBL).

Freight Forwarders 

Freight Forwarders could be described as travel agents for freight. They are  the experts who understand how the end to end shipment process works. Some forwarders do sometimes also act as carriers, most commonly by also operating a truck fleet. Similarly, the big international couriers also own and fly cargo planes.

Customs Brokers

Customs brokers specialize in customs filing and clearing, as explained in the Customs Process chapter. Freight forwarders either work with a customs broker as an agent or handle customs broking in-house. See more in the Freight Forwarders chapter.

3PL : Third-Party Logistics Providers

Third-party logistics providers (3PLs) take on some or all of a company’s distribution and fulfillment services. Many larger forwarders also provide this service. This form of outsourcing is covered in the Third-Party Fulfillment chapter.

Shippers

The only key player left is a shipper. For outsiders, this seems rather confusing but as forwarders and carriers set it, you are the person wanting to “ship” the goods.

Key Freight Terminology

Door To Door & Port To Port

This basically describes whether the shipment service provided is between ports or from/to another destination that requires trucking or railing services. The shipment leg between the export country and the import country is called the main transit or main leg. If the forwarder responsible for arranging this leg is also picking up the shipment at the factory, the shipment is called door to port. Similarly, port to door covers the main transit from the foreign port to final delivery. In door to door, the forwarder is handling the entire shipment.

Multimodal

The humble shipping container not only revolutionized international freight, it also revolutionized international trade and global economic growth. Multimodal simply means shipping by container. Once a container is “stuffed” with a shipment, it moves by road, ocean and/or rail until it is finally opened somewhere in the USA ( or Asia). The whole process is so streamlined that inland cities like Denver or Chicago in USA (and ICD locations like Delhi, Bangalore, Coimbatore in India or Chaoyang dry port in China) can act as ports, complete with customs clearance, deconsolidation (we get to that soon) and as the named place for some incoterms (ditto). These “inland ports” are usually referred to as inland freight interchanges.

Key multimodal terms that you should know are:

FCL (full container load). This means that you are paying for a whole container which, depending on your load size, may be cheaper than a less than container load The load doesn’t have to fill the container, as for, say ¾ loads booking FCL is cheaper than booking LCL.

LCL (less than container load). Booking LCL means that your shipment is taking up only a part of the container and will almost certainly be shared with other shipments in that container.

Consolidation/Deconsolidation. Consolidation is the process managed by the forwarder or carrier whereby the LCL shipments sharing a container are “stuffed” together. Deconsolidation is the opposite, that happens near a port at the end of the port to port leg.

Intermodal. This term is often used interchangeably with multimodal, but there is a difference. With intermodal more than one forwarder is used, meaning there will be more than one bill of lading, and more communication required.

Trucking

FTL and LTL are the trucking equivalents of FCL and LCL, namely a full truckload shipment and a less than truckload shipment. US regulations require truckloads to be charged by a complicated method called freight class. Most products get classified by density. This freight class calculator estimates the freight class for density products. It also goes into detail about how freight class works.

Dimensional Weight

Freight class may be complicated, but other modes of transport can get that way too. Very light shipments that take up much more space than their weight would indicate are charged by dimensional weight, that is the weight at which your shipment’s dimensions would be reasonably profitable to carry. Each mode, ocean, air, trucking in other countries, have their own formula. In fact, every shipment is charged at the greater of actual weight or dimensional weight. That weight is called the chargeable (or billable) weight. Dimensional weight is also called dim weight, volumetric weight or cubed weight.

You don’t need to understand how it works, but don’t be perturbed if your shipment is very light and your requested freight quotes come back charged at a very different weight than you requested. Use this chargeable weight calculator to find out the freight class for density products, and to learn more about how freight class works.

The Key Freight Documents You Should Know

Commercial Invoice. This is the normal proof of sale, provided by the supplier to the importer, and in itself is not a freight document. It becomes one because Customs requires it for clearance. The Ordering chapter covers where this document fits in with negotiation.

Certificate of Origin (COO). Your supplier will prepare this in conjunction with their chamber of commerce. This document is also required by Customs for clearance because it helps identify banned items and duty payable. Your forwarder will require this when the Shipper’s Letter Of Instruction document (below) is prepared.

Material Data Safety Sheet (MSDS). This document only applies to hazardous goods and is usually provided by the supplier. Again, your forwarder will require this when the Shipper’s Letter Of Instruction (below) is prepared. This document is covered in more detail in the Product Research chapter.

Fumigation Certificate. This document is only required if wood, and some other natural products, are included in the shipment. This most often applies to pallets and crates. Your supplier must arrange for this. Again, it required for customs clearance, and your forwarder will need it when the Shipper’s Letter Of Instruction (below) is prepared.

Freight Forwarder Contract (“T&Cs”). Like any other agreement that you sign with a service provider, you are required to sign off on their standard terms and conditions before they work on your shipment.

Power Of Attorney (POA). Like the commercial invoice, this is a widely used document outside the freight industry. By your signing one of these, your forwarder can deal with Customs on your behalf. You’ll sign a POA at the same time you do the T&Cs.

Shipper’s Letter of Instruction (SLI). With the above forms ready to go, this document kicks off the shipping process. It is your order form, proof that you are purchasing from the forwarder. This document is covered in more detail in the Request For Freight Quote chapter.

Booking Confirmation. This is your receipt for the main transit, whether ocean or air. The carrier provides it to your forwarder, who should forward it on to you. In some cases, the booking confirmation number is also the shipment tracking number.

Bill of Lading/Air Waybill. These very similar documents used for ocean freight and air freight respectively, are the contract of carriage for the main transit leg. Like any other contract, it has terms and conditions which limit forwarder and carrier liability. Your forwarder prepares the bill of lading. This document also provides proof of ownership of the goods in case of damage, theft or loss. Some forwarders add the shipment tracking number on this document.

There usually isn’t the same formality with booking pickup and drop-off. There’s a lot more flexibility in making arrangements with a local trucking company than with container ship or airline carriers. Emails are usually the only documentation required.

Packing List. This is your receipt of goods at delivery. It is attached as a pouch on the goods and also emailed ahead. It is only required when shipped goods are packed into larger units, like a container or an aircraft console. The supplier completes this form, although the forwarder will also complete one if the goods are re-packed at their warehouse.

Buy Price vs Landed Cost

Landed Cost

When you are negotiating a price with your supplier (covered in the Negotiating Strategy chapter), it’s tempting to get fixated on the buy price. The lower the buy price the better the markup. Right? But, there are two other costs to take into account before those goods are safely in your inventory. They are customs charges and freight costs.

LANDED COST = BUY PRICE + FREIGHT COSTS + CUSTOMS CHARGES

The Customs Duties chapter goes over how to get estimates for duty costs. And, getting reliable freight cost estimates from a freight rate calculator is covered in the Mode Selection chapter. But your freight charges will vary depending on how much responsibility you are willing to take.

Your supplier will probably only arrange all the freight if they can make up for it with a higher buy price. Similarly, you will only pay all the freight if you can make up for it in a lower buy price. But it’s not uncommon for inexperienced buyers to squeeze a better deal out of a supplier, but fail to realize the consequences when the supplier accepts a lower buy price, in exchange for switching incoterms. That might seem harmless, but, switching from FOB to EXW, for instance, might have wiped out all the gains made by the cheaper buy price. So what are Incoterms?

Incoterms

Incoterms are standardized freight terms that are used in international sales agreements. There are eleven of them in all, each differing in where, during the shipment, the responsibility (arranging and paying) and liability (for resolving any problems) transfers from the seller to the buyer.

Most suppliers have a preferred combination of incoterm and selling price. Often, that’s CIF (Cost, Insurance and Freight), which means their responsibility for the goods ends at the US port. It is commonly used, however, for smaller buyers this incoterm (and the three other incoterms starting with the letter “C”) are disasters waiting to happen. This is explained in the Freight Forwarders chapter.

The safe and more common incoterms that you should be negotiating, are:

EXW (Ex Works), where you take full responsibility and liability from factory pickup.

FCA (Free To Carrier), where you take responsibility and liability once the shipment is handed over to the carrier, typically for consolidation at carrier’s premises near the port.

FOB (Free On Board), where you take responsibility and liability once the shipment “crosses the ship’s rail.” Technically FOB wasn’t designed for freight that goes into containers or airplanes, but it does work well for full container loads. However, it shouldn’t be used for LCL or air freight, because they need to be consolidated before they are handed over to the carrier. Also, for air freight, there is no “ship’s rail.”

 

Stick to this advice, and you probably won’t need to know much more about incoterms. They do get complicated. The following table brings the main points together. For more detail, turn to the Incoterms In Plain English guide.

Calculating Landed Cost

Now that you get landed cost and incoterms, you can bring it all together to calculate landed cost. Say you want to know what your target buy price would be with EXW and with FOB:

Use this freight rate calculator to quickly find this out. Work out the door-to-door freight rate (for EXW) and the port-to-door freight rate (for FOB) to get the two different freight costs.

Then, simply add your customs duty estimates to calculate landed cost for both freight terms.

Now you have your target buy prices for negotiating either incoterm.

 

Shipping disruption: Why are so many Ships queuing to get to the US?

Global supply chains are congested. In California, there have been record-breaking queues of container ships outside major ports. "We are facing an unprecedented cargo surge at the ports of Long Beach and Los Angeles due to major global pandemic production shifts and decades-old supply chain challenges," says the mayor of Long Beach, California.

So what's causing the Ship Queue?

Satellite imagery over the ports of Long Beach and Los Angeles show a swarm of idle ships, waiting to offload their cargo. These are container ships transporting goods - just about everything you can imagine from toys to tennis raquets - from Asia across the Pacific Ocean to the western coast of the United States.

Marine Traffic, a ship-tracking website, counted more than 50 container ships outside Long Beach and Los Angeles on 13 October. These two ports handle the bulk of cargo coming from China, so once the congestion starts it can very quickly get worse, says Janet Porter, Chair of the Lloyd's List Editorial Board.

The whole shipping cycle has slowed down. So you have ships waiting days, even a couple of weeks to unload their cargo.

About 25% more cargo was shipped from Asia to the US in the first eight months of 2021 compared with the same period in 2019 pre-pandemic, according to Container Trades Statistics. The volumes have largely remained the same between Asia and Europe.

On the eastern coastline, there have also been queues of ships outside Savannah Port in Georgia. August was the second busiest month ever.

Then there's the process of transporting the goods inland from overcrowded shipyards full of containers by a workforce hit by the pandemic. On the supply side, locked-down ports in China and elsewhere have contributed to shortages.

So Americans have been buying more stuff?

Yes, often instead of going on holidays or out to dinner. Consumer goods demand is overall 22% higher compared with pre-pandemic levels (comparing February 2020 with August 2021). The Capital Economics group notes particularly big jumps in imports of toys, games and sporting goods (up 74%), as well as household appliances (up 49%).

A variety of factors led to an increase in imports, Prof Christopher Tang from the University of California Los Angeles explains.

"Currently, many ocean carriers are carrying holiday merchandise such as billion dollars of Halloween decorations, and many billion dollars of Christmas decorations such as artificial Christmas trees and Christmas lights."

Prof Tang also says the US pushing for economic recovery, is a cause for demand.

As private firms encourage employees back to offices to work in person, there is a big surge in demand for office equipment ranging from computers, printers and servers, and many of them are now stuck in various containers from Asia.

This is in addition to equipment for office upgrades to reduce the spread of coronavirus. "Many air filters along with ventilation equipment are also in these containers waiting to be unloaded," says Prof Tang.

And there's an immediate personnel problem, says Gary Hufbauer, Senior Fellow at the Peterson Institute for International Economics - the lack of skilled port workers, truck drivers and rail crew to move everything.

Too little, too late?

To try to ease the situation, US President Joe Biden announced that the Port of Los Angeles in California would work around the clock. But not everyone thinks this will help enough at this point.

"If only this initiative was taken 12-months ago, the clogged up logistics in the US could have been in a much better position today than is the case," Mr Sand says. "It's not enough to keep ports open 24/7."

He adds that to resolve the problem all parts of the supply chain - including truck drivers, train operators and warehouse operations - need to swiftly "add capacity".

The energy crunch in the world's second largest economy has led to electricity rationing - another blow for businesses already facing rising costs for raw materials and the impact of coronavirus lockdowns.

For Coca-Cola : NO CONTAINERS! NO PROBLEMO!

Coca-Cola is going to great lengths to transport materials by using bulk shipping vessels. Bulk shipping vessels are typically used for raw materials like grain and coal. The ongoing shipping crisis has caused major supply chain disruptions, making many goods harder to find and more expensive.

Coca-Cola has become the latest global company to take a creative approach to to manage supplies during the current shortages in the container shipping sector. The beverage giant reported it is having problems moving supplies around the world to its bottling plants and distribution facilities.

“When you can’t get container's or space due to the current ocean freight crisis, then we had to think outside the box (or the container),” wrote Alan Smith Procurement Director - Global Logistics at The Coca-Cola Cross Enterprise Procurement Group based in Ireland.

Coca-Cola turned to the alternative of using dry bulk carriers and reverting to the traditional breakbulk approach to moving the materials its needs to maintain operations. Smith at Coca-Cola explained the strategy saying that the company was moving 60,000 tons of materials to keep its production lines running. He said it was the equivalent of 2,800 TEU. In response to comments, he said the beverage company required the coordination of supply chain partners and suppliers and collaboration at the ports to avoid hefty detention and demurrage charges, but the number of trucks required was about the as if they were doing containerized shipments.

As part of his social media message, Smith posted photos of three Handysize bulkers, Weco Lucilia C,  Aphrodite M, and Zhe Hai 505, along with the loading process. He said the hope was that this would be the first of many shipments in the coming months.

Another advantage was highlighted by using the ships which are all roughly 35,000 dwt. The smaller size and traditional cargo handling capabilities versus the requirement of the large box cranes to unload the ships is permitting Coca-Cola to avoid congestion at the major ports. “We are heading to some more non-congested ports, so we are hoping for a smooth discharge,” said Smith. Two of the vessels, according to AIS data, are currently in China, while the third, the Zhe Hai 505, departed China.  

Regulating the Shipping Industry

REGULATING THE SHIPPING INDUSTRY

Exporters globally have been suffering from extremely high freight rates and container shortages. In many cases container shipping rates have increased 5 times or more, and waiting time for empty containers needed to ship exports have extended to several weeks. There is no doubt that a lot of this has to do with genuine disruptions brought about the global pandemic. But by early 2021 consumption, production, and trade had largely recovered from the initial shock and rebounded to the pre-pandemic normal.

While global container shipping lines have registered record profits, exporters and trade have continued to suffer from delays, unavailability of containers, and steep increase in container shipping rates. Exporters in India too, have been reaching out to government for relief.

India’s National Trade Facilitation Action Plan (NTFAP) 

Finding the appropriate regulatory instruments to curb unfair trade practices by shipping lines and bring transparency to their pricing has been part of India’s National Trade Facilitation Action Plan (NTFAP) agenda since 2017.

The policy developments in the US on this issue are pertinent for two reasons. First, being one of the biggest consumers of container shipping services, policy in the US would have global ramifications. Second, the US policy response might have important lessons for regulators in India, and other G20 economies.

US initiatives

Based on the complaints received by industry associations, the US Federal Maritime Commission (USFMC) undertook an inquiry which established that there were indeed problems in the way container shipping lines were imposing charges for demurrage and detention, and there was a need for much greater oversight and transparency. Based on these findings the USFMC issued a set of interpretive rules for detention and demurrage in 2019 and 2020. The pandemic only made things worse, leading to calls for more robust regulation.

In response a formal Fact-Finding Commission (FFC) was set up to investigate a larger set of issues. The FFC report released in July 2021 made a case for stricter regulation of the shipping industry stressing that there was an intrinsically unequal relationship between large global shipping conglomerates and their customers, especially MSMEs. Normal channels for contract dispute resolution were considered inadequate since MSMEs seeking legal or regulatory remedy might be subjected to retaliation from the powerful shipping lines and the costs of litigation could be very steep.

US President Joe Biden issued the Executive Order on Promoting Competition in the American Economy, July 9, 2021 which required the USFMC to strictly enforce the prohibition of unjust and unreasonable practices by shipping lines.

However, industry observers felt this didn’t go far enough, and there was need for legislative changes for stricter regulation. Consequently, Congressmen Garamendi and Johnson introduced the Ocean Shipping Reform Act of 2021 in August with bipartisan support from Democrats and Republicans.

The contents of this draft law should be of interest to Indian policy-makers for meeting of the NTFAP. Of specific interest are the following elements of the draft law.

(i) Providing for strict rules to prevent unreasonable demurrage and detention charges

(ii) Putting the burden of proof for establishing the reasonableness of any demurrage or detention charges on shipping lines and not the shippers

(iii) Requiring shipping lines to maintain all records supporting the assessment of any demurrage or detention charges for 5 years, thereby ensuring transparency. Such records are to be accessible to the regulator on demand.

(iv) Measures to ensure reasonable availability of containers needed for US exports

(v) Measures that ensure allocation of space on vessel for US exports and ensure that shipping lines do not unreasonably decline export cargo

(vi) Prohibition against retaliation against a business by shipping lines by their refusing, or threatening to refuse cargo space, or resort to other unfair methods because the shipper has patronised another carrier, or has filed a complaint against a shipping line.

THE IMPACT OF THE POLICY MOVES

Introduction of the law has a caused a buzz. The maritime regulators of the three big trading economies, i.e., US, EU, and China held their biennial summit in September. While it was not officially acknowledged, the challenge posed by unilateral regulation of what is essentially a global industry must have dominated the meeting agenda. Global cooperation would be the ideal situation, with perhaps the G20 providing a forum for such regulatory collaboration. But India and other G20 economies could also learn from the US example, and strengthen their own national legislation first to initiate reforms.

The impact of the policy moves in the US is already being felt. On September 9, CMA-CGM, the world’s fourth largest container shipping line, announced that they will stop all spot-rate increases immediately. A competitive market cannot function without effective regulation, especially under an oligopolistic structure. Indian policy-makers need to follow developments in the US closely when considering policy options to support Indian businesses get fair and equitable access to container shipping services. This is also imperative for the success of Indian exports and the country’s successful participation in global value-chains.