What is demurrage?
Demurrage is a fee commonly applied in international shipping when cargo stays at a port or terminal beyond the allotted free time stated in the shipping agreement. Since shipping companies prioritise swift and efficient cargo movement, these charges are intended to encourage timely loading, unloading, and container turnover to ensure smooth operations within ports.
It’s important to distinguish demurrage from detention charges. While demurrage applies to delays in clearing loaded containers from the port, detention fees are incurred when empty containers are not returned within the agreed timeframe.
Who is responsible for demurrage charges?
Responsibility for demurrage charges generally lies with the party in charge of the cargo, most often the importer or exporter. However, the specific shipping contract will outline who is liable in each case. It is crucial for all involved parties to clearly understand and agree upon these terms in advance to avoid misunderstandings or unexpected financial liabilities.
In most situations, if the cargo is not picked up or delivered within the allowed grace period, the cargo owner bears the demurrage costs. That said, the contract may assign responsibility to another party under specific conditions, for example, if a freight forwarder causes a delay by failing to complete customs documentation, they may be held accountable for the charges.
What are the causes of demurrage?
Demurrage charges often arise from delays beyond the standard free time allowed at ports. Below are the common causes that can lead to such delays:
- Delays in customs clearance: Lengthy inspections or procedural bottlenecks at customs can hold up cargo release.
- Incorrect or incomplete documentation: Missing or inaccurate paperwork can prevent timely cargo processing.
- Inefficient port operations: Congestion, lack of equipment, or slow handling processes can cause shipment delays.
- Unforeseen events: Strikes, adverse weather conditions, or equipment breakdowns can disrupt schedules.
- Poor stakeholder coordination: Miscommunication among freight forwarders, shipping lines, and port authorities can lead to delays.
- Lack of preparedness by consignee: Failure to arrange timely transport or warehousing for incoming goods can increase port storage time.
Being aware of these factors allows businesses to proactively mitigate demurrage risks. There are some demurrage charges that can be avoided with better operational planning, while others arise from unavoidable external disruptions.
Avoidable causes of demurrage
- Incomplete or incorrect documentation, causing containers to get stuck at customs
- Limited visibility across the supply chain, resulting in unexpected delays
- Poor communication, leading to late arrival of containers
- Delays in payments to port authorities, Customs and Border Protection (CBP), or carriers
Unavoidable cause of demurrage
- Bad weather or natural disasters like floods or earthquakes
- Global events, such as the Suez Canal blockage in 2021 or the Russia-Ukraine war
- Labour shortages at the port, lack of vehicles, or strikes by truck drivers, which delay container movement
- Unplanned customs inspections, which often cause delays in moving containers
What are demurrage rates?
Demurrage rates are the fees imposed for exceeding the free time allowed for container usage at a port. These rates vary depending on factors like container type, cargo nature, and port-specific regulations. Typically, the rates escalate over time to discourage prolonged container use. For instance, a container might have a daily demurrage rate of Rs. 50 for the first few days, increasing to Rs. 100 thereafter. Understanding these rates is vital for businesses to anticipate potential costs and manage their logistics efficiently. Demurrage rates serve as a deterrent to ensure swift cargo clearance and prevent port congestion.
How is demurrage calculated?
Demurrage is calculated based on the terms outlined in the agreement between the shipper and the carrier or terminal operator. The following factors typically influence the final charge:
- Time: Charges begin once the agreed free time expires. The longer the cargo remains at the port beyond this period, the higher the total cost.
- Rate: The contract specifies daily or hourly demurrage rates, which may vary based on the port, shipment volume, and contractual terms.
- Cargo type: Goods requiring special handling, storage, or temperature control often attract higher demurrage fees due to additional logistics.
- Port policies: Each port or terminal may follow its own demurrage rules, including different free time limits and fee structures, which must be factored into the calculation.
- Custom terms: Parties may agree on tailored demurrage conditions that differ from standard practices, potentially altering how charges are applied.
Example of calculation of demurrage charges
Suppose a 20-foot container gets 5 days of free time. The demurrage rate is Rs. 50 per day for the next 5 days, and Rs. 100 per day after that.
If the container stays at the port for 10 days:
- First 5 days: Free
- Next 5 days: 5 × Rs. 50 = Rs. 250
- Total demurrage = Rs. 250
If the container had stayed 15 days, the next 5 days (after day 10) would be charged at Rs. 100:
- Additional 5 days: 5 × Rs. 100 = Rs. 500
- Total demurrage = Rs. 250 + Rs. 500 = Rs. 750.
How to avoid demurrage and detention charges?
Avoiding demurrage and detention charges requires proactive planning and efficient logistics. Here are some useful tips to help minimise these costs:
- Plan ahead: Schedule loading and unloading within the permitted free time and prepare contingency measures for delays like bad weather or strikes.
- Work with local freight partners: Partner with local agents familiar with port regulations and procedures to avoid operational bottlenecks.
- Maintain clear communication: Ensure all involved parties, such as customs, carriers, and handlers, are aligned on timelines and responsibilities.
- Prepare documentation in advance: Make sure all necessary paperwork is complete, accurate, and readily available to prevent clearance delays.
- Prioritise customs clearance: Understand customs requirements in advance and ensure all documents are in order to avoid delays at the terminal.
- Monitor shipment status: Use cargo tracking tools to stay updated and receive alerts for any potential delays.
- Negotiate contract terms: Seek extended free time or more favourable demurrage terms during contract discussions if delays are likely.
- Optimise cargo handling and container returns: Improve turnaround times by making loading/unloading processes more efficient and ensuring empty containers are returned promptly.
- Choose flexible shipping schedules: Select timelines that align with your operational capacity to avoid last-minute issues.
- Review shipping contracts carefully: Different ports and carriers have unique demurrage and detention policies, so always check the specific terms.
- Use off-site laydown areas: Where available, consider using external storage to reduce the risk of incurring demurrage fees at the port.
