What are detention and demurrage in the shipping industry?

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what are detention and demurrage in the shipping industry

Demurrage and detention charges in the shipping industry serve as incentives for efficient cargo handling and the timely return of equipment.

These charges play a crucial role in helping shipping lines and port operators tackle major challenges: ensuring the smooth flow of goods, supporting their financial sustainability, reducing port congestion, and contributing to the overall efficiency of the supply chain.

Why are the importers being charged with demurrage and detention fees?

Shipping companies provide importers with a specific timeframe upon vessel arrival to settle all charges, complete customs clearance, and collect their goods. During this period, the container can remain in port free of charge. However, due to various factors, importers may require more time to fulfill the necessary formalities. Consequently, if the container or cargo remains at the port or terminal beyond the agreed number of days, demurrage fees are imposed by the carrier or port authority as compensation for the delay in container release and to encourage the timely movement of goods.

Similarly, importers are typically allowed a specific number of days free of charge to transport the container to their premises, unload the cargo, and return the empty container. However, if the consignee retains the empty container outside the port or marine terminal beyond the allotted free period, detention fees are billed by the shipping line or logistics provider, such as freight forwarders. These fees are intended to cover the expenses associated with the extended use of the equipment and the resources tied up due to the delayed return of containers.

To summarize, the distinction between demurrage and detention lies in the status and location of the container. Demurrage applies when the cargo is still inside the terminal, waiting to be picked up. On the other hand, detention comes into effect once the container has been released to the importer and continues until its empty return.

For most ocean carriers, the number of free days included in shipping contracts without incurring demurrage and detention typically ranges from 7 to 14. However, the shipping line sometimes allows the merchant to purchase extended free time at the destination when they expect delays. This applies only to specific shipments, depending on the type of goods (special cargo such as Reefer, Out of Gauge, or Hazardous have been excluded) and the importing country. This extended free time forms an integral part of the contract of carriage. The number of free days is set at 14, 21, or 28, and these cannot be added to the standard D&T free time.

importance of detention and demurrage

What is the importance of detention and demurrage for the shipping industry?

Billing for detention and demurrage charges serves multiple purposes for ocean carriers and port authorities:

Efficient use of equipment and resources

Detention and demurrage charges incentivize shippers and consignees to promptly load/unload cargo and return empty containers to the port terminal or another designated location as required by the shipping line. These financial penalties for delays encourage the efficient use of shipping equipment and resources, in order to make sure that containers are available for the next shipment and reduce congestion at ports.

One of the causes of port congestion since 2020 is the shortage of containers for loading new cargo. This situation results in delays in shipments, supply chain disruption, and increased costs for importers and exporters. This occurred during the post-confinement period, forcing shipping companies to relocate empty containers from specific countries to regions with high demand, mainly from the US and certain European ports to China. Within a matter of months, freight rates from Asia experienced a significant surge, reaching unprecedented levels. For example, in early 2021, the costs of ocean transportation between Asia and US West Coast ports, including Long Beach and Los Angeles, rose by approximately 145%.

Smooth flow of cargo

Timely return of empty containers is vital for maintaining the smooth flow of goods throughout the supply chain. Detention and demurrage charges discourage excessive delays, helping to prevent bottlenecks and congestion at ports, terminals, and storage facilities.

In addition to discouraging delays, these charges incentivize efficient cargo handling practices and promote better resource utilization. By imposing financial penalties for extended container usage, shippers and consignees are encouraged to prioritize the timely movement of cargo, minimizing storage costs and maximizing operational efficiency. With effective detention and demurrage policies in place, the shipping industry can achieve optimized and streamlined processes, ensuring a seamless flow of cargo while benefiting all stakeholders involved.

Cost recovery for shipping lines

Shipping lines utilize detention and demurrage charges as a means to recover costs associated with the extended use of containers or occupying port facilities. Delays caused by customers indeed result in additional expenses related to container rental, equipment utilization, port storage, and administrative overheads.

Encouraging better logistics planning

The need to avoid or minimize detention and demurrage charges encourages shippers and consignees to enhance their logistics planning. This involves coordinating shipment schedules, optimizing cargo handling processes, and ensuring the timely availability of equipment and personnel. Such initiatives enhance supply chain efficiency and enable reduced transit times.

Revenue generation for port operators

Detention and demurrage charges also contribute to the revenue stream of port operators and terminal owners. These fees help support the maintenance and expansion of port infrastructure, including the construction of additional berths, storage facilities, and container yards.

This investment in infrastructure enhances the operational capacity of ports, allowing them to handle larger volumes of cargo and accommodate more vessels efficiently. Ultimately, the revenue generated through detention and demurrage charges contributes to the continuous development and modernization of port facilities, ensuring their ability to meet the evolving demands of the shipping industry and provide superior services to customers.

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What is the tariff for demurrage and detention?

There is no universal or fixed rate for demurrage and detention charges as they are determined by individual carriers and may be subject to negotiation. The tariff can vary depending on factors such as the shipping line, country, port, and specific terms and conditions outlined in the contract of carriage or the shipping line’s tariff schedule. It is advisable to consult with the respective shipping line, freight forwarder, or marine terminal operators to obtain accurate and up-to-date information regarding their detention and demurrage charges. Demurrage charges are calculated by multiplying the penalty (demurrage or detention) rate with the number of days that exceed the time limit.

Nevertheless, ocean carriers are subject to certain restrictions on their demurrage and detention practices, primarily to safeguard the interests of shippers and consignees. In the United States, the Federal Maritime Commission (FMC) is responsible for overseeing this aspect as part of its mandate to regulate international maritime transportation and trade practices. The Commission ensures that shipping lines adhere to legal requirements and apply fair and reasonable demurrage and detention fees. Moreover, it has the authority to handle disputes and complaints pertaining to these charges and conducts investigations into potential violations of the Shipping Act of 1984. Additionally, the FMC acts as a mediator in resolving conflicts between shippers, consignees, and ocean carriers, promoting transparency and preventing unjust practices.

It is easy to determine the amount owed for demurrage and detention to the carrier as it can be accessed on the shipping line’s website using the bill of lading number. The page displays detailed information about all containers associated with the bill of lading in real-time, including the allotted free time per container and the deadline for free days.

On Maersk.com, consignees have the option to view an estimate of demurrage charges based on the expected gate-out date, as well as detention charges based on the intended empty return date. A breakdown of the fees is also available. It is important to note that only the consignee can access the specific charges, while other parties can only see the last free day.

tariff for detention and demurrage

Conclusion

While detention and demurrage can bring benefits to shipping companies in various ways, the additional costs involved can have a significant impact on importers’ profitability. Thorough preparation is crucial to avoid demurrage and detention charges. This begins with:

  • optimize sourcing/logistics planning;
  • closely monitoring the expected time of arrival (ETA) of the cargo, using Sinay’s ETA calculator;
  • ensuring all necessary documents are ready for customs clearance and cargo release from the shipping line
  • arranging truck or rail bookings for inland haulage.

 

On a larger scale, there is a need for improvement in container logistics, optimization of transportation networks, and enhanced coordination among shipping lines, port authorities, shippers, consignees, and other stakeholders.

As the specialized agency of the United Nations for international shipping regulation and coordination, the International Maritime Organization (IMO) promotes best practices and cooperation among industry stakeholders to enhance efficiency, reduce unnecessary delays, and minimize costs in the shipping process.

In this regard, while the IMO does not directly regulate demurrage and detention charges, its rules and initiatives indirectly influence how shipping companies and terminals handle these practices, emphasizing the importance of fair and transparent processes. For instance, regulations concerning vessel emissions, fuel standards, or route restrictions can impact shipping schedules and port operations, potentially resulting in delays and increased costs, which may then have implications for demurrage and detention charges.

Frequently Asked Questions About Detention and Demurrage

Detention in the shipping industry refers to the charges imposed on importers or consignees when they hold onto the shipping company’s empty container beyond the allowed free days, either inside the port or at a designated container yard.

Demurrage in the shipping industry refers to the fees levied on importers or consignees when containers or cargo remain inside the port terminal beyond the allotted free time, after being discharged from the vessel.

Detention refers to charges incurred when importers or consignees hold onto the shipping company’s empty container beyond the allowed free days, while demurrage is the fees imposed when containers or cargo remain inside the port terminal beyond the allotted free time after being discharged from the vessel.

In essence, detention pertains to the delay in returning empty containers, whereas demurrage relates to the delay in collecting cargo from the port.

Incurring demurrage and detention charges can have several consequences, including increased costs for importers or consignees, delays in cargo movement, potential disruptions to the supply chain, and additional strain on port infrastructure. It is essential to avoid these charges to maintain efficient logistics operations.

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