Companies need to understand factors in both the macro and microeconomic environments. After all, these aspects can cause changes in consumption, even due to exchange rate policies. Among these factors is the topic of this text: freight indexers.
Therefore, understanding these indexers is a necessity for companies that aim to import and/or export their products since carriers and/or airlines can use them due to various economic factors.
Indexers make up the value of international freight. Therefore, they directly affect the final cost of the product and, as a result, the company’s financial results.
The following text explores the topic of international freight indexers. We will discuss here what the main indexers are, as well as what rates can be related to bills of lading, along with possible strategies to achieve the best cost-benefit in hiring freight.
What are freight indexers?
When defining the value charged for their products and/or their provision of services in a global scenario, companies conduct a study to define the pricing structure, which consequently is relative to a specific period of the global economic scenario.
As there are various factors that cause prices to vary, it is necessary to update prices so that the company does not incur losses in its operations.
In the context of foreign trade, it is no different. Therefore, carriers and airlines use freight indexers to “update” the values of their services, and these appear through the collection of fees in international freight, so that the value is leveled according to the situation causing some trade imbalance.
What affects the value of international freight?
Some of the factors that directly affect the value of international freight would be:
- Exchange rate fluctuations
- Market conditions (a recent example was the COVID-19 pandemic)
- Government regulations
- Seasonality
Main indexers for international freight
The main indexers that can have the greatest impact on the final cost of international freight are:
- Bunker Adjustment Factor (BAF): BAF charges are related to changes in the price of oil and are updated monthly according to the price of a barrel of oil in the international market.
- Currency Adjustment Factor (CAF): This rate is applied to avoid possible losses at the time of payment to the carrier and/or airline, given the exchange rate difference between shipment and actual payment. In Brazil, a percentage is generally charged on PTAX, which is the reference rate of the Real (BRL) to the US Dollar (USD). When values are in another foreign currency, the conversion value is considered from the exchange bulletins of the Central Bank of Brazil (BACEN).
- Peak Season Surcharge (PSS) or General Rate Increase (GRI): This is an additional charge that occurs during certain periods of the year due to high demand.
Understand AWB fees
The Air Waybill (AWB) is the document that allows the transit of goods between the origin and destination in the air mode. It contains all relevant information about the cargo, such as data from the importer and exporter, the cargo, and the flight.
When goods/products/raw materials from various importers are consolidated, the House Air Waybill (HAWB) and the Master Air Waybill (MAWB) are issued. The agent is responsible for issuing the HAWB, and the airline issues the MAWB. The former relates to the relationship between the importer and exporter. The MAWB indicates the relationship between the cargo agent and the airline.
It should be noted that even when using a cargo agent, it is possible to issue only the AWB, commonly known as the direct MAWB. The values that usually appear in the AWB are:
- Freight
- Fuel surcharge (FSC)
- Security surcharge (SSC)
Depending on the Incoterm (International Commercial Term) of the shipment, the document may also include the value of pick-up, as well as another fee, according to the specificity of the shipment and/or special conditions presented by the cargo (such as refrigerated, pharmaceutical, perishable, or dangerous cargo).
It is worth noting that the preparation of the AWB must strictly follow Resolutions 600a and 600b of the International Air Transport Association (IATA).
Understand BL fees
For international maritime transport, the Bill of Lading (BL) is considered.
In addition to attesting to the possession of the goods, the document contains information about the shipment, the parties involved, and the transport conditions.
In maritime transport, involving the participation of cargo agents and/or consolidation, the documents issued are the House Bill of Lading (HBL) and the Master Bill of Lading (MBL). The cargo agent issues the HBL, and the shipper issues the MBL.
Regarding the values, in addition to the indexers and the value of international freight, fees are charged: port fees, container handling fees, security and cargo monitoring, and BL release. Below is the abbreviation for some of these fees:
- BL Fee: BL release
- Terminal Handling Charge (THC): Amount charged for the handling of each container
- Bunker Adjustment Factor (BAF): Adjustment to compensate for changes in fuel prices, as this is one of the largest costs for shippers.
- International Security and Port Security (ISPS): Charge related to security and monitoring actions.
Other fees may be charged due to specific transport conditions or according to route conditions, such as:
- Food grade: In literal translation, it means “food standard.” This is new equipment requested for a specific product’s transportation, not limited exclusively to food.
- War risk surcharge: When the route passes through war and/or conflict regions.
- Emergency risk: For routes that may experience security incidents, such as a pirate attack, which is still common in the African region.
Is it possible to avoid GRI in international maritime freight?
The General Rate Increase (GRI) is one of the freight indexers that represents, in its literal translation, the general tariff increase implemented by shippers at certain times of the year for various reasons.
The major challenge in avoiding this freight indexer is that it is not possible to anticipate when this increase will occur since this situation is not regulated by any government. In other words, it is an unpredictable factor that depends solely on the economic analyses of the shipper.
Although challenging, it is possible to avoid GRI by implementing some strategies, which may include the use of monitoring and indexing tools for international freight charges.
Anticipate shipments whenever possible
Anticipating shipments is a factor that can benefit the entire supply chain of the company. However, it is necessary for internal departments to come together and determine what they can do to avoid generating a trade-off, in which they save on international freight but end up increasing the cost of inventory and reducing the company’s working capital.
In this way, the solution may be to carry out careful planning, involving internal departments, suppliers, and logistics partners.
Avoid the Peak Season
The Peak Season is also one of the freight indexers because it is a period of high demand that generates a backlog, meaning the available space is less than the actual shipping requirements. Consequently, shippers charge a higher freight rate, along with the addition of a fee to secure the shipment.
Major bottlenecks in maritime transportation are caused by two Chinese holidays, the Chinese New Year in February and the Golden Week in October.
On the other hand, in air transportation, bottlenecks usually occur during vacation and holiday periods, as passenger planes carry a lot of cargo on their flights. During these times, there is a decrease in cargo capacity.
Negotiate split and/or consolidated shipments with the supplier
A strategic alternative is to set a horizon for logistical planning with the supplier. This way, dates when the supplier can deliver the cargo and the possibility of splitting or consolidating shipments with other cargo are examined.
Study the economic feasibility of your import with Cheap2ship
Many companies wish to have successful and profitable operations, even in a highly volatile environment. After all, consumer preferences change constantly. Therefore, these companies need not only an effective strategic plan but also reliable information that can support the proper use of resources, as this is the key factor for global business success.
Cheap2ship is a platform for managing and hiring domestic and international freight. Since 2017, we have been using updated data on indexers and international freight values to strategically cooperate with companies in their decision-making processes.
In this way, we aim to offer accuracy and optimization, as well as assist in the analysis of the economic feasibility of imports.
Interested? Contact us, and let’s talk!
