• Ocean Freight in International Shipping | The Complete Guide

    Ocean Freight

    The rise of easier overseas shipping has been a huge boost for exporters and importers all over the world. This growth has been fueled largely by ocean freight shipping -- nearly 90% of global trade is driven via sea and ocean transport today. Ocean freight today provides a safe and cost-effective way to transport all kinds of goods. This has resulted in nearly 200 million containers being shipped through ocean freight every year.

    What is the meaning of ocean freight?

    Put simply, ocean freight is a mode of transporting goods through sea. Under this practice, large quantities of goods are packed in containers and transported overseas using sea routes. It is one of the most common modes of transportation used by exporters and importers worldwide.

    Why Ocean Freight?

    Ocean freight offers some important benefits in international trade:

    1. One of the major benefits of the practice is its ability to deal with large shipments, or cargo that is bulky or heavy such as vehicles, furniture, equipment, etc. Different-sized containers (20 ft., 40 ft., etc.) are available depending on the size of the product and shipment.

    2. Ocean freight shipping offers more cost-effective rates as compared to other forms of transport like air.

    3. Ocean Shipping is not just beneficial for transportation of heavy cargo, but also for smaller shipments, as multiple such smaller shipments can be combined to fill a container. This offers important cost-advantages for these shipments as well.

    4. As maritime safety has improved, accident rates in ocean shipping have significantly dropped over the years. The vessels used in ocean shipping are increasingly designed to handle hazardous or dangerous materials as well, unlike air freight, which has restrictions on the transportation of such shipments.

    5. Lastly, ocean shipping is also more eco-friendly -- CO2 emissions, or the method’s ‘carbon footprint’, is much lower than other forms of transportation.

    How does ocean freight work?

    The process for ocean freight is usually as follows:

    Step 1 - There is an agreement between a buyer and a seller, presumably from two different countries. They decide to conduct a trade transaction under an agreed Incoterm, which decides how the ownership and risk transfer will take place, and most importantly, who is responsible for the shipping process and cost of transportation. For example, in an Ex Works (EXW) transaction, the buyer or importer pays for the entire transportation cost, right from the supplier’s factory or warehouse.

    Step 2 - The goods are labelled and packed as per shipping standards.

    Step 3 - Next step isbooking ocean freight, for which one needs the services of a freight forwarder, as it is not possible for an exporter to carry out this step themselves. Freight forwarders are responsible for booking a container (FCL or LCL) for you, according to what is best suited for your shipment.

    Step 4 - The goods have to be transported from the supplier's factory to the port of the supplier’s country (this can also be done with the help of a freight forwarder).

    Step 5 - Having your marine insurance in place is also an important step (before the shipment procedure takes place).

    Step 6 - Goods are loaded in an FCL or LCL Container depending on the volume and requirement of the trade transaction (the decision is either made by the dealing parties or the freight forwarding agent) and then loaded onto the vessel.

    Step 7 - A bill of lading is issued by the ocean carrier after the goods are loaded onto the vessel. It serves as an important document in this entire process as a contract between the shipper and the carrier which holds all important details of the transaction and also serves as the title of the goods.

    Step 8 - Once the goods are loaded onboard the shipment passes through customs at the origin port.

    Step 9 - The goods are then processed for shipping.

    Step 10 - Once the goods reach the destination port, the import customs clearance has to be completed along with paying tariff duty associated with the imported goods (if duty is applicable).

    Step 11 - Finally, the transportation of goods from the port to the buyer’s place has to be arranged (which can again be done with the help of a freight forwarder).

    How is ocean freight cost calculated?

    Sea freight is one of the most efficient ways of dispatching goods. In comparison to air freight, the cost of shipping is a lot cheaper. The charges under ocean shipping are decided based on the nature of goods being transported, the weight or volume of goods, distance to the destination port, and the rates being set by the shipping carrier.

    One important factor influencing cost is the shipper’s decision to go with either an FCL or an LCL container.

    FCL shipment

    Full Container Load (FCL) is best suited for large shipments. By having an entire container dedicated to their shipment alone, an exporter can be in a better position in terms of risk and safety measures. Freight forwarders generally give a more favorable deal on FCL shipments.

    LCL shipment

    Less than Container Load (LCL) is more suitable for small shipments. Here, an exporter’s shipment shares space with other containerized goods. It’s less time-consuming and is cost-effective for smaller shipments.

    Other Charges that are part of Shipping Cost

    • Inland transit charges - Transportation cost for delivering goods till the shipment port
    • Ocean freight - This is the base rate for ocean freight. Under LCL this cost is calculated as: weight (in tons) or volume (in cubic meters) of the shipment, whichever is higher, multiplied by the base rate charged by the shipping line. Under FCL the base rate is based on container capacity.
    • Documentation charges - Cost of all the necessary documents required for verification and custom clearing procedures
    • Terminal charges - The depot charges for handling and maintaining goods at the port terminal
    • FCL & LCL fees - Cost of the container you choose to export/import your product
    • Customs value - Cost of customs clearance proceedings
    • Security charges - Costs of securing goods against damage and risk factors
    • Insurance - Marine insurance cost for covering the safety of goods
    • Duties and taxes - Customs clearance charges and specific country taxes are to be paid by the dealing parties according to the distribution of duties
    • BAF (Bunker Adjustment Factor) - It is a fuel surcharge charged by shipping lines for adjusting for volatility in fuel prices
    • CAF (Currency Adjustment factor) - Price charged by shipping lines to adjust or hedge against volatility in currency exchange
    • Delivery at depot

    These cost and freight charges are borne by the buyer or seller depending on the incoterm rule that they have chosen for their transaction.

    Incoterms used in Ocean Shipping

    There are certain incoterms which are used in international trade in ocean shipping to ensure that the shipping bill is well-coordinated between the buyer and seller, in terms of who is responsible for conducting the process and bearing the cost of shipping. The most commonly used incoterms when transporting goods by sea are as follows:

    FOB Value

    Here, the responsibility of delivering goods till the origin or exporter’s country’s port are carried out by the seller, and the duties thereafter rest with the buyer. This means that the buyer bears the cost of ocean freight.

    FAS Value

    Here the responsibilities of parties are similar to that under FOB. The only thing that differs between the two is that in FAS, the loading of goods on the vessel port is the responsibility of the buyer.

    CFR Value

    Under CFR, the responsibility of the seller rests till the destination port, which means that here the seller is responsible for bearing the cost of ocean freight, but he’s not responsible for getting insurance.

    CIF Value

    The responsibilities in CIF are similar to those under CFR, as here too the seller bears the cost of ocean freight. The only difference is that under CIF, he’s also responsible for getting insurance.

    The incoterms mentioned above are restricted to sea/ocean transport. But you can also use EXW, FCA, CIP, CPT, DAT, DDP, and DAP incoterms for inland waterways.

    Also read: Incoterms 2020: Importance in International Trade & Changes

    Differences between sea (ocean) freight and air freight

    The choice between air and sea freight when shipping your goods overseas typically depends on several factors such as:

    • Size, quantity and weight of the shipment -- Air freight is not suitable for heavy or bulky goods
    • Nature of Materials or Goods being transported -- Air Freight has restrictions on certain hazardous materials
    • Cost of transportation -- Air freight is usually more expensive as compared to ocean freight
    • Speed of Transportation -- How fast the goods have to be transported

    In the case of small shipments, air freight can be a cost-effective option for exporters who have lower terminal charges at the destination. As flights to most countries depart daily, it can be relatively simple to send shipments as soon as possible. The biggest advantage of air freight is, of course, that if the exporter has a shipment in a landlocked country or a country which is inaccessible for ocean services, he can use air freight instead, and charge his customers for transport charges if the cost is too high for him to bear.

    Most ships under Ocean Freight sail once a week, so the time period when transporting by this mode can be quite long. But in the case of large shipments, and also when the shipments are not bound to strict delivery timelines, ocean freight is the better option as it is much cheaper and has less restrictions as compared to Air Freight.

    Types of Ocean freight ships

    The following are the most common types of freight carriers used for shipping business:

    BULK CARRIERS

    Bulk carriers are also called self-discharging carriers. The average height of the carrier remains 800 feet and the weight is somewhere around 150,000 tons. They have large hydraulic hatches and are commonly used for transporting unpacked bulk cargos such as sand, crushed stone, coal etc.

    CONTAINER SHIPS

    Container ships are commonly referred to as standard ISO containers. The average height of the ship remains 20/40 feet and the deadweight is somewhere around 8,000-20,000 tons. They are equipped with vertical beams that facilitate long loading of goods. The process in a container ship is faster than any other general purpose carrier.

    TANKERS

    Tankers are also one of the common carriers used for freight proceedings. They come in many sizes and shapes, with some of the largest nearly a quarter-mile long. They are used for liquid goods such as petroleum products, wine, etc.

    BARGES

    There are various types of barge ships that facilitate shipping. Barges come in different sizes, ranging from 180 ft. to 230 ft. and more. These are often used for transporting grain and ore, container goods, and liquid essentials.

    RORO SHIPS

    RORO ships have greater speed of loading and unloading procedures. The maximum lifting capacity is 30 tons and a deadweight ranging around 1,000-10,000 tons. They can be used for wheel cargo, such as trucks, cars, trailers, ferries, etc.

    REEFER SHIPS

    Reefer ships can be categorized into three types: side-door vessels, conventional vessels, and refrigerated containers. They are best suited for perishable products such as meat, fish, bananas, dairy products and other foods. These are maintained in controlled temperature regimes (typically plugged into 440V AC electrical outlets), so the cargo inside remains safe during the shipping.

    Raghav Khajuria
    Raghav Khajuria
    Leads Marketing activities for Drip Capital.
    11 min read