Calculating Origin & Destination Pricing

C A P T. J E F F R E Y M O N R O E , M M , A M P E

S E N I O R P O R T C O N S U LTA N T - H DR

I N T E R N AT I O N A L A S S O C I AT I O N O F M A R I T I M E A N D P O R T E X E C U T I V ES

P R O F ES S I O N A L M A R I T I M E E X E C U T I VE D E V E LO P M E N T P R O G R A M T M

The Logistics Plan What has to be moved? How is it moving? What are the terms? What does it cost? How long does it take? What modes/port are being used? What challenges are they facing?

O/D Analysis Follows A Process1. Begin with a global perspective

2. Understand the full capability of your assets

3. Determine how your facility and your customers fit into that picture

4. Develop a base of information related to global opportunities

5. Develop a database of information related to customer's cargo flow, costs and challenges related to the movement of their cargo

6. Determine if you have a competitive advantage and sell it to your customer

Global Flow Patterns-O/D Mix

Grain Production Areas◦ China Imports 4% World Grain

Legume Production Areas

Shale Production Areas

Economic Swings-Expectations2015 to 2021 (6 Years)

WHO IS HANDLING CARGO AND WHERE TO/FROM?China, SE Asia to NA Traffic to Grow◦ Strong developing hub & spoke lynchpin

China trade increase 30% (5% per year)

Vietnam exports to NA+44%, Europe +43%◦ Manufactured goods, home appliances, machinery

India expected to increase

China-East Africa trade expected to increase◦ Malawi, Mozambique, Zambia, Zimbabwe◦ Emerging Chinese hub in Africa

(Source IHS Global Insights)

Carrier Selection Criteria Source NASSTRAC Freight Transportation State of the Industry Report 2020

RATES 50.9%

Reliability of On Time Delivery 47.4%

Financial Stability 18.4%

Reliability of On-Time Pick Up 9.6%

Geographic Coverage 9.6%

Knowledge of Shipper Needs 9.6%

Safety Record 8.8%

Total Transit Time 7.9%

Reputation for Dependability 6.1%

Other 16.7%

FOCUS THE DATA AND DEVELOP A MICRO VIEWWHAT THE SHIPPER IS PAYING AND HOW THE CARGO IS

MOVINGTHE O/D ANALYSIS◦ Shipper’s Total Cost◦ Ocean/River Rates◦ Wharfage ◦ Terminal Fees◦ Stevedoring◦ Labor Differentials◦ Value Added Services◦ Outside Transportation Services-Drays/Rail◦ Ship Fees (Dockage, Pilotage, Tugs) if applicable

Global Perspectives are ALWAYS Based on Quantifiable Information

◦ SHIPPERS (Best source of information)◦ Previous Studies◦ Common Carriers◦ Local Business Interests◦ Marine Operators (Terminal Operators, Stevedores)◦ Truckers◦ Railroads◦ Trade Associations◦ Warehousing, distribution and retail interests

Sources of Information•GOVERNMENT DATA

•US Department of Commerce Import/Export Data

•US Customs Data

•US Army Corps of Engineers Data

•TRB Freight Activity Forecasts

•UN Conference Trade & Development (UNCTAD)

•State Economic Development Agencies

•Commercial-JOC/PIERS, Drewry, FreightCalculator.com, Colliers, Logistics Management, World-freightrates.com

•Intermodal Association of North America

•Cyber-Feeds: Maritime Executive, Maritime Professional

Comparative Mode PricingPer ton, per mile, non-volume adjusted

Truck: $ .37 cents per ton per mile

Rail: $ .03 cents per ton per mile

Air: $ 4.63 per ton per mile

Water: $ .10 per ton per mile

Transportation Cost and Pricing Transportation and Facility Costing is always a science

to the provider

It's always a mystery to the customer

Pricing structures: Based on the operators costs, plus a contingency margin and

a profit percentage Pricing often involves a number of “additional fees” in an

attempt to minimize liability The customer is paying the provider to care for and transport

and the “how” details are optional Contracts established for specific period

Rates developed for type of cargo and expected volume

Rates And Costs Are Generally Always Based On Volume

Smaller the volume or more irregular the shipment, the higher the cost

Special handling always adds cost Special protections adds cost Off schedule always adds cost Additional services adds cost

The shipper generally always bears the cost.

But Not Always!

Shipper Based Costing Most consumer based commodity cargo is moved on

a per unit basis Neo-bulk or bulk cargoes are moved on a per ship

basis-through charter parties- Voyage Charter- Vessel Charter- Time Charter

Short termLong Term

Ocean Move MethodCritical Component

Liner Service- Scheduled services- Goods to and from fixed ports of call- Limited quantity per shipment

Charter- Control over loading and discharge ports- Economy of scale for large shipments

Transportation Pricing Method Key Component

• Market Rates• Monopoly Rates• Cost of Service Pricing• Value of Service

Pricing• Special Rates

– Character of Shipment

– Less than Rates– Multiple unit rates– Incentive rates– Per unit rate– Any quantity rates– Density rates

• Area, location or route rates

• Time/Service rates• Corporate volume rates• Discount rates• Loading allowances• Aggregate tender rates• All commodity rates• Released rates• Empty haul rates• Two-three way rates• Spot market rates• Menu pricing

Costs Include Wide Range of Other Fees

Brokers’ commissions Fuel assessments

Low Sulfur Fuel Surcharge

Government fees (HMT) Customs Filing fees VGM Fees Container Royalties Equipment return fees Repositioning fees Deadhead fees Special Handling/Holiday rates Feeder, barge and towing rates

Not to Mention………Harbor Maintenance Tax: Channels and Dredging

Dockage (Facility Maintenance)

Barge In/Out and Fleeting Fees

Berth Maintenance Fees (Dredging)

Fire Department Inspection Fees

Environmental Agency Fees (petroleum-per bbl.)

Mandatory Vessel Escort Charges

VTS/ATON Assessments

Security Assessments

Government Service Fees

Example: Fuel SurchargesTowboat, Rail, Truck, Ship

Fuel Costs up $500 million worldwide

ECA requires 0.01% Fuel Sulphur content-ULS

Worldwide 3.5%> 0.5% by 2025 ◦ Deadline moved to 2020

Costs for transporting agricultural goods up as much as 7.5 percent,

Costs for manufactured goods up by 3.5 percent

Costs for industrial raw materials by 16.4 percent.International Convention for the Prevention of Pollution form ships (MARPOL) Annex VI Regulations for the

Prevention of Air Pollution from Ships Section 14.

Diesel Fuel TaxInland Water Trust FundInland Waterways Trust Fund◦ Established under the Inland Waterways Act 1978

Assessed on fuel for towboats

Currently 29 cents per gallon on diesel fuel

Assessed on 27 segments inland water system

The fuel taxed waters all commercially inland navigable rivers as well as the Gulf and Atlantic Intracoastal waterways.

Funds construction and rehab of inland system

Pilotage Fees

Regulated by Individual States or USCG◦ Required on foreign vessel/US vessel on foreign voyage

Practices Set by State Pilot Commissions

Pilots must be trained and licensed by the StateOR Hold a USCG Pilotage License Endorsement

Pilotage Rates Set by State Commissions & Based on:◦ Vessel Size-Length, Gross/Net Tonnage, Pilot Units, Draft, Displacement Tonnage,

Deadweight Tonnage, Minimum Fee◦ Type of vessel and distance to be traveled◦ Number of pilots required & Pilots groups involved

◦ i.e. Mississippi River: Associated Branch Pilots, Crescent River Pilots, New Orleans-Baton Rouge Pilots◦ Total distance 233.9 Statue Miles, 40K ton vessel-$15,000+◦ Affected most by pilot salaries

Barge Transportation PricingBased on contract or freight rate basis

Some “tramp” activity

Companies can own/operate only towboats, only barges or own/operate both

70%-80% of loads move south, 20%-30% north

Companies can tow barges that are exclusively theirs or pick up other units based on space

Higher in grain season (Aug to Oct)

Price based on size, tonnage, current rate

Spot Hire and Ton-Mile Towing

1. Tow vessel service provider and barge owner/agent

2. Terms, conditions and rates

3. Billing and special charges

4. Tracking, reporting and contact personnel

5. Cargo types and special cargo carriage

6. Taxes and fees

7. Cargo clearance and DHS compliance

8. Standby and demurrage

9. Condition of vessels to be towed

10. Limit of liability related to cargo

11. Liquid bulk cargo protections

12. Safe berth designations

13. Crew size

14. Insurance and indemnity

15. SHEX-SHINC (Sun-Holidays)

16. Force Majeure

17. Applicable law

Barge Pricing ConsiderationsFreight rates often bid to meet revenue goalsDraft management of barges key to efficiencySeasonal variations-generally tied to grainDelays dramatically increase costs to operators

◦ Lock delays, river closures, accidents, ice, weather, terminal delays, equipment breakdowns, standby/demurrage, USCG regulatory issues

Container on BargeAdvantages of Intermediate River Transit include:◦ Lower cost for transit than rail or truck◦ Lower cost river terminal handling north of Baton Rouge◦ Up river closer to shipper sources

Disadvantages include:◦ Seasonal closures cargo shifts to rail or truck at higher cost and lower priority◦ Transit time on the river◦ Unpredictable delays at locks

Limited service choices out

of some ports◦ i.e. NOLA vs. US West

Coast to Asia

Down River International ConnectionsPort of New Orleans

Sample RatesSt. Paul to NOLA $20-$23 per ton◦ 1,700 Statue Miles calculated in rate

1,500 ton barge (only) $300 p/d lease or demurrage p/d

$300-$400 p/hour towboat (in rate or extra for barge lease)

15 barges,1,500 Tons per barge=22,500 Tons◦ @ $20.00 per ton=$450,000 total revenue

1%-1.5% Profit margin on towing/barge services

Hopper Barge Iowa to NOLA-$25,000 southbound (all in)

Hopper Barge NOLA to Iowa-$18,000 northbound (all in)

Additional Charges◦ Fuel Surcharge $150-$300 range◦ Barge In/Out Fees ($300/$300) ◦ Daily charge for fleeting applies ($50)◦ Barge cleaning rates can apply-$2,500

Shippers Cost-COB, International1. Initial Dray -trucker rate from shipper origin point to up river marine terminal\

2. Load Port Terminal Handling/Wharfage -Generally a per ton or per container rate.• Based on the annual operating cost of the terminal, plus profit and contingency margin/divided by the annual volume

3. Stevedoring Fee - for Loading onto Barge, Crane Hire and Security

4. Per Container Barge Rate -for Transportation on the River

5. Down River Discharge Port Terminal Handling/Wharfage

6. Stevedoring Fee -for Offloading to Connecting Terminal, Crane Hire and Security

7. Down River Terminal Transload Wharfage to Ship

8. Down River Terminal Stevedoring Fee -for Ship Loading, Crane Hire and Security

9. Ocean Carrier Rate, Ancillary Fees (Fuel Surcharge, Broker, Special Handling)

10. Government Fees

11. Destination Port Terminal Handling/Wharfage Rate

12. Destination Port Stevedoring Fee

13. Government Fees

14. Destination Dray

Midwest to Asia DestinationContainer on Barge (Gulf Coast) Vs. Rail (West Coast)

BARGE

Origin Dray $25.00Load Port◦ Wharfage $135.00◦ Stevedoring $150.00◦ Security $ 10.00

Barge Rate $750.00Discharge◦ Wharfage $100.00◦ Stevedoring $175.00◦ Security $ 15.00

River Rate $1,360

RAIL

DOMESTIC MOVE(Excludes Ocean Freight Rate And Seaport

Handling Rates)

Origin Dray $ 900.00Rail Rate $1,200.00Total $2,100.00

TOTAL CONTAINER SHIPPER COSTMidwest to Singapore

VIA NEW ORLEANS

River Rate $1,360

Ocean Rate $2,400

Discharge Port $ 300

TOTAL $4,060

VIA LOS ANGELES

Rail Rate to LA $2,100

Ocean Rate $1,700

Discharge Port $ 300

TOTAL $4,100

Ocean Freight RatesOct 15, 2021

O/D Shipper Costs

Containerized Agri-cargo Iowa to China◦ Truck to rail to ship via Seattle $95 ton

Bauxite-Bulk (1,100 miles source equidistant)◦ Ontario to Tennessee -via rail$68 ton◦ Turkey to Tennessee via ship

via Port NOLA-ship to barge $50 ton

ENTERING THE EXPORT MARKETExplain How Market Reach is a Function of Cost

Geography Based Pricing

Boston Shipper Moving Containerized Cargo

What will $ 2,000 USD allow a shipper to do?

Trucking cost to Philadelphia, PA = Ocean Cost to Rotterdam

Common Pricing Mistakes Made by Shippers

Not taking advantage of competitive market forces or competition

Not understanding current market rates Not accounting for additional services Not shifting the burden to the carrier Not anticipating special needs Wrong Terms of Sale Not anticipating the need for Plan B

Time For Plan B

TERMS OF SALE-International Chamber of Commerce Incoterms 2010

Pre-defined International Cargo Terms-marine/inlandDefines point when risk, obligations, costs are transferred from seller to buyer including cargo liabilityDefines the Point of DeliveryOwnership determined by Bill of Lading/WaybillPayment defined in B/L or Waybill

• Origin-Freight Collect

• Origin-Freight Prepaid

• Origin-Freight Prepaid-Charged Back

• Destination-Freight Collect

• Destination-Freight Prepaid

• Destination-Freight Collect and Allowed

INCOTERMS 2010

EXW-Ex Works-place of delivery, buyer cost

FCA-Free Carrier-place of delivery, seller cost

CPT-Carriage paid to named destination

CIP-Carriage/Insurance to named destination

DAT-Delivered at named terminal

DAP-Delivered at Named Place

DDP-Delivered duty paid

FAS-Free alongside ship-named port shipment

FOB-Free on Board-named point of shipment

CFR-Cost and freight paid to destination

CIF-Cost, insurance, freight paid to destination

Destination Pricing OptionsDESTINATION B/L

(DOOR-DOOR)More inclusive

Generally includes origin/destination dray

Includes stevedoring charges and assessments

May or may not include filing fees, fuel surcharges or broker commissions

Government fees extra

PORT B/L(POINT TO POINT)

Less all inclusive

Excludes (origin)destination dray

Free time/demurrage more significant

Excludes other port fees for services

Surcharges and fees are generally extra

Government fees extra

Petroleum is easiest to price

Per-barrel charge based on delivery miles Vessel usage charge on barges

Trucks

Truck rates are based on per-ton, per-mile Plus applicable fuel surcharges

Rail

Rail costs are based on per-ton or per unit, per-mile, plus handling charges

Moving Cargo is About Details

Trucking Costs (Dray)Load Terminal CostsInland River TransportDischarge Terminal CostsTerminal Reload CostsOcean Carrier CostsDischarge Terminal CostsOverseas Dray CostGovernment FeesBroker CostsMiscellaneous Fees

Business Development is Based on KnowledgeQUESTIONS?