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  • 3.6.4-COTTON MARKETING-FREIGHT

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  • Freight

    Chapter 3 - Cotton marketing - Logistics 

     
     

    The total freight cost of exports, which is the cost of moving cotton from the point of origin to its final destination, comprises interior freight from gin yard or interior warehouse via land transport (rail or truck) to ocean shipping port, ocean freight from the shipping port to the disembarkation port, and delivery to the final destination (usually a spinning mill, sometimes a warehouse). Freight is a substantial part of the final delivered-mill price of the cotton. Sales contracts define precisely who is responsible for the payment of freight charges.
     


    Shipping

    Basic shipping terms

    Break bulk cargo is stowed loose in the ship’s hold. The disadvantages of break bulk shipping are numerous: the goods can be exposed to the weather during loading and discharge; the bales can be torn; there is a risk of contamination from other cargo during the voyage. Marine insurance is usually higher for break bulk cargo.

    Containerized cargo remains in the container throughout the journey, often to the final inland destination. Container transit is faster, more efficient and more secure than break bulk. The cotton can be loaded in the container at the gin and transported all the way to the overseas spinning mill. Modern container vessels spend only short periods in port as all cargo is assembled before arrival, and container handling can proceed irrespective of weather conditions. Strict schedules can be maintained, and turnaround times are shorter.

    Liner services are regular, scheduled shipping services between fixed groups of ports that operate regardless of cargo availability. Tramping vessels, on the other hand, make irregular, opportunistic calls at ports when cargo is available. Unless specifically stated to the contrary, all cotton contracts automatically stipulate that shipment will be by liner vessel, operated under a regular, scheduled service. A small percentage of cotton, usually from and/or to non-standard locations may be transported under ‘charter terms’. In theory, vessels can also be chartered for larger tonnages but chartering is a complex business and conditions for each charter must be negotiated individually. Shipment on chartered vessels is usually arranged by importers.

    Conferences are groups of ship owners that offer regular sailings by guaranteeing the number of vessels that will be available during the year between different ports and the schedules that will be maintained. Most scheduled ocean liners probably operate under liner conferences (known simply as conferences). Conferences schedule and guarantee sailings to and from an agreed range of ports, thereby eliminating duplication among their members. The system benefits both sellers and buyers because freight rates are fairly stable, schedules are published well in advance, and regular and dependable services are provided. Conference vessels are usually of good quality and the operators normally have ample experience of carrying cotton.

    The discontinuation in October 2008 of the European Union’s block exemption from anti-trust rules for shipping line conferences means that shipping lines will have to find some other way to group themselves.

    Vessels belonging to non-member shipping lines are called non-conference vessels. Such vessels may nevertheless also operate on pre-arranged schedules. On some routes they provide the only regular competition to the conferences.

    Vessel sharing arrangements (VSA) or alliances are eroding the former dominance of the traditional conferences. In VSA, several carriers offer a joint service by agreeing a frequency and capacity from and to certain ports. The lines share the vessels that each contributes, but each carrier markets and sells freight space on an individual basis. Individual freight contracts can still be negotiated with each line and depending on the space available buyers can also nominate a choice of carriers for the goods.

    Shipping hubs and container feeder vessels are becoming increasingly important as the shipping industry evolves to meet the demands of globalization and the proportion of bigger vessels in world fleets is growing. Larger vessels call only at ports with the required deep water offering both the cargo and the mechanized capability to handle it quickly and efficiently. Smaller ports increasingly feed cargo to the nearest regional hub.

    Transshipment means that the first vessel discharges at an intermediate port and the goods are reloaded on to another vessel to the final destination. This is increasingly frequent as shipping companies rationalize operations. In particular, the use of containers has encouraged the development of shipping hubs: larger or more central ports that are fed containers from outlying ports by smaller vessels for loading on to large container vessels.

    Shipping abbreviations and terminology

    AI (all inclusive).

    All in rate. Freight rate that is inclusive of all surcharges and extras.

    ARB (arbitrary charge). Charge for added expense, such as transshipment charges or ice-breaking charges.

    BAF or FAF (bunker adjust factor, or fuel adjustment factor or surcharge). Extra charge applied by shipping lines, or set by liner conferences on behalf of their members, to reflect increases in the cost of fuel, which are beyond the control of the carrier. This surcharge is expressed either as an amount per freight ton or as a percentage of the freight.

    CAF (currency adjustment factor). Surcharge applied to freight rates by shipping lines or set by liner conferences on behalf of their members, to compensate for extraordinary fluctuations in currency relationships to the tariff currency, the United States dollar. It is normally expressed as a percentage of the freight and may be negative or positive.

    CFS (container freight station). A place where consignments are grouped together (consolidated) as a number of TEUs. It may be accommodated on board a ship.

    CY (container yard). Place to which full container loads are delivered by the shipper to the ocean carrier and to which empty containers are returned. A container yard is also be a place where containers can be parked, loaded (or stuffed) or unloaded (or de-vanned), picked up or delivered, full or empty.

    CY/CY. Container yard to container yard movement of cargo.

    CFS/CY. Container freight station to container yard movement of cargo.

    FCL (full container load) simply means the seller/shipper was responsible for stuffing the container and the cost thereof. The contents of a sealed container cannot be verified from the outside. The FCL bill of lading simply states ‘received on board one container STC [said to contain] X number of bales of cotton, shipper stow and count’. In other words, in an FCL bill of lading the shipping line acknowledges receipt of the container, undertakes to transport it from A to B without losing or damaging it, but does not commit itself as regards the contents.

    Freight final. Most standard contracts for the sale of cotton under the terms of CFR and CIF stipulate ‘freight final’, meaning that any changes in the cost of transportation between the time of entering into the contract and the time of delivery are for the seller’s account. Only increases that enter into force after the shipment took place shall be for the buyer’s account.

    ‘House to’, ‘container yard to’ and ‘door to’ mean loading controlled by the shipper at the place of his or her choice. Whoever books the freight must pay all costs beyond the point of loading and the cost of providing containers at the house, CY or door.

    LCL (less than container load) means that the carrier is responsible for the suitability and condition of the container, and the stuffing thereof. The carrier pays for this and then charges an LCL service charge. The bill of lading will state ‘received in apparent good order and condition X number of bales said to weigh X kg’. The carrier accepts responsibility for the number of bales but not for the weight. Shipping lines will generally agree to carry cotton as LCL provided the containers are filled or stuffed on the carrier’s premises, ideally at a container freight station (CFS). It has become accepted practice in some countries for containers to be stuffed at sellers’ premises at their expense, under the supervision of the carrier or the carrier’s appointed agent.

    ORC (origin receiving charge) is a charge, added to the base freight rate, that reflects the cost of handling cotton from place of origin to on board intermodal conveyance. ‘Pier to’, ‘container freight station to’ and ‘container base to’ mean that the carrier controls the loading. The cotton must be delivered to the carrier at the pier, container freight station or container base.

    Point of destination is the exact place where the cotton is delivered to the person who has ordered it, or that person’s agent, and where the carrier’s responsibility ends.

    Point of origin
    is the exact place where the carrier or the carrier’s agent receives the cotton and where the carrier’s responsibility begins.

    ‘Shipper’s load and count’ means the shipper is responsible for the contents of the container.

    TEU (Twenty-foot equivalent unit). A unit of measurement equivalent to one 20 foot shipping container, used to quantify, for example, the container capacity of a ship, or the number of containers on a particular voyage or over a period of time. It may be the unit on which freight is payable.

    THC (terminal handling charge), TRC (terminal receiving charge) and CYC (container yard charge). Charge payable to a shipping line either for receiving a full container load at the container terminal, storing it, and delivering it to the ship at the load port, or for receiving it from the ship at the discharge port, storing it and delivering it to the consignee.

    ‘To house’, ‘to container yard’ and ‘to door’ mean delivery to the warehouse or mill yard selected by the person who booked the freight.

    ‘To pier’, ‘to container freight station’ and ‘to container base’ mean that the carrier will unload (de-van) at the carrier’s warehouse in the port of destination, the container freight station or the container base.

    Transit time is the time for goods to be carried from one place to another.

    War risk
    is a surcharge for higher insurance premiums for vessels operating on difficult or dangerous trade routes. Such unforeseen costs are a result of force majeure and may be passed on to shippers or buyers, usually at a flat rate per container.

    Shipping in containers

    Until the 1970s the only available ocean vessels were ‘break bulk’. Nowadays, almost all cotton transported over water is shipped in containers. Shipping cotton bales in containers is a major improvement over the old break bulk method but still involves extensive handling. Cotton can be loaded into containers at a ginnery or warehouse and transported all the way to the spinning mill overseas, saving the cost of loading and unloading cotton during transit.

    As transport and freight costs are charged per container, rather than by weight, it is important to fully exploit a container’s carrying capacity. The container capacity is the total cube a container can accommodate. The term cube often refers to the cubic measurement of cargo. The capacity (i.e. the internal volume) is determined by multiplying the internal dimensions, that is, the product of internal length, width and height. The rating is the maximum gross mass (or weight), that is, the maximum permissible weight of a container plus its contents. The tare mass is the mass (or weight) of an empty container. The payload is the maximum permitted mass (or weight) of payload, including dunnage and cargo securement arrangements that are not associated with the container in its normal operating condition.

    Therefore, payload = rating – tare mass.

    The most widely used type of container is the general purpose (dry cargo) container.

    Container capacity (of ships, ports, etc.) is measured in 20-foot equivalent units (TEU). A TEU is ameasure of containerized cargo capacity equal to one standard 20 ft (length) × 8 ft (width) × 8.5 ft (height) container. In metric units this is 6.10 metres (length) × 2.44 metres (width) × 2.59 metres (height), or approximately 39 cubic metres. Most containers today are of the 40 foot variety: 40 ft (length) × 8 ft (width) × 8.5 ft (height) and thus are 2 TEU (approximately 78 cubicmetres). Two TEUs are referred to as one 40-foot equivalent unit (FEU). ‘High cube’ containers have a height of 9.5 ft (2.9 metres). The rating of a 20 foot dry cargo container is 24,000 kg (52,900 lb), and that of a 40 foot, including the high cube container, is 30,480 kg (67,200 lb).

    Standard containers used for cotton shipping are usually 40 foot boxes containing about 19.5 tons of baled cotton (net weight), typically between 80 and 90 bales. This may vary greatly depending on the various origins and sizes of the bales. Twenty foot containers are also used occasionally for cotton shipping. Bales are usually brought into their packing position using a forklift truck with bale clamp, and they are packed with their narrow, curved side in the direction of the longitudinal axis of the container.

    Ocean freight rates

    During the last three decades, seaborne trade of cotton followed the general trend in maritime transport of dry cargo, shifting from conventional ships to container ships. The rapid growth of the container fleet was accompanied by a concentration among shipping companies and an expansion in the share of larger vessels. The world cotton industry benefited highly from containerization, which led to shorter transit times and lower transportation costs.

    Ocean freight is nowadays usually quoted as a lump sum per container, regardless of the payload or contents. Containers are usually shipped under FCL/FCL conditions (loading and discharge costs are not included in the freight rate). The cost of loading and discharging containers varies between container terminals and between shipping lines, sometimes considerably.

    Freight rates are quoted in United States dollars. Freight rates are governed by factors more numerous and complex than the distances involved, and they fluctuate all the time with demand and supply, currency changes, oil price changes, etc. Depending on the routes, freight rates for cotton exports would range between $20 and $120 per ton (between 1 and 5 cents per pound).

    Freight charges are of great importance to producing countries, because the real cost of raw cotton for the spinner is the price ‘delivered mill’. If cottons from country A and from country B are used for the same purpose, the two origins can be substituted and should therefore be priced the same. If the ocean freight from country A is 1 cent per pound higher than the freight from B, then the FOB price for A should be 1 cent per pound lower to match the landed cost of B.

    Freight rates used to be set by the so-called steamship conferences. The conference members would agree among themselves to charge fixed freight rates from certain origins to certain destinations. There were also carriers who did not belong to a conference (non-conference carriers), usually charging lower than conference rates. The conference system gradually fell apart during the past decade. It is now customary for exporters and carriers to negotiate individual freight agreements with shipping lines, sometimes on a worldwide basis. Shipping rates are based on volumes booked by the exporter during a certain time period with the carrier. Thus, as actual freight rates are not publicly known, many bills of lading simply state ‘freight as per agreement’ or ‘freight payable at destination’.

    Ocean freight includes variable elements beyond the control of shipping companies. The most important are the cost of fuel and exchange rate fluctuations. Carriers may offer fixed base freight rates for the entire cotton marketing season by having the most volatile components of the freight rate stated in the form of adjustment factors.

    Ocean freight rates are usually calculated on a per-container basis, using the following formula:

    Container rate= container rate+ [container rate x (CAF)] + THC + BAF+ ARB


    3.6.4-en 

     

    Cotton and fire

    Cotton has been transported by ships for many centuries. Especially in the nineteenth century and the first half of the twentieth century, many fires broke out in this cargo. For example, when the steamship City of Montreal caught fire on the Atlantic ocean in 1887 it was reported that ‘she was carrying a cargo of 8,000 bales of raw American cotton, and was the 73rd ship with such cargo to catch fire in only 5 months’. The fires were caused by heating (stowage next to the engine room), self-heating and cigarettes thrown away between the cargo during loading. Extinguishing a fire in cotton was very difficult because water does not easily penetrate the compressed bales.

    As a result of these fires, the cargo was regulated by IMO (the International Maritime Organization) without a United Nations number (UN number) until 2000; the UN number 3360 was allocated in 2000.

    To fit more cotton in a container, the bales have been increasingly compressed since the 1970s. At the beginning of the twenty-first century, tests were carried out on these bales to determine whether the risk of fire was sufficiently low to allow cargo to be shipped as not IMO-classified. The results were very positive, and Special Provision 299 was added to UN 3360.

    International Maritime Dangerous Goods (IMDG) code data:

    • FIBRES, VEGETABLE, DRY (COTTON)
    • IMO Class 4.1, UN 3360
    • EmS F-A S-I (Schedules on how to deal with fire and with a spill)
    • Stowage Category A (means on or under deck allowed)
    • Ignite readily.

    5.2.2.1.2.1 A package containing a dangerous substance, which has a low degree of danger, may be exempt from these labelling requirements. In this case, a special provision specifying that no hazard label is required appears in column 6 of the Dangerous Goods List for the relevant substance. However, for certain substances the package shall be marked with the appropriate text as it appears in the special provision e.g.: 

     

    Substance  UN No.  Class  Mark required on bales 
    Baled dry vegetable fibres in cargo transport unit UN 3360 4.1 NONE
    Special Provision      

     

    29 The packages, including bales, are exempt from labelling provided that they are marked with the appropriate class (e.g. ‘class 4.2’). Packages, with the exception of bales, shall also display the Proper Shipping Name and the UN number of the substance that they contain in accordance with 5.2.1. In any case, the packages, including bales, are exempt from class marking provided that they are loaded in a cargo transport unit and that they contain goods to which only one UN number has been assigned. The cargo transport units in which the packages, including bales, are loaded shall display any relevant labels, placards and marks in accordance with chapter 5.3.

    117 Only regulated when transported by sea.

    299 Consignments of: cotton, dry having a density not less than 360 kg/m3 according to ISO 8115:1986, are not subject to the provisions of this Code when transported in closed cargo transport units.