Understanding common terms in the world of shipping and logistics is important so you can maintain effective operations throughout the supply chain. One term that shouldn’t be overlooked is demurrage which can end in unexpected and unnecessary expenses when not managed well.
What is demurrage when it comes to shipping? Let’s take a look at this beginner’s guide to understand everything you need to know about demurrage so you can avoid it in the future.
What is Demurrage in Logistics?
When cargo remains at a port terminal or container yard longer than the allotted free time, a penalty fee is charged by shipping lines. This is called demurrage. Typically, containers will arrive at the port and are allocated a fixed number of free time. Demurrage will be charged and imposed if the charter fails to load or unload the vessel or return shipping containers within the free time period as per the contract.
In other words, cargo can remain at a port terminal for that fixed duration of free time without paying any charges. Demurrage charges are then applied if your cargo happens to remain at the port after the given free time expires.
Key Differences Between Demurrage and Detention
Demurrage and detention are both additional fees when it comes to shipping and logistics. It’s important to note that demurrage and detention fees are implemented to encourage faster movement of cargo for a smoother supply chain.
Demurrage
A demurrage fee is applied to cargoes that remain in the terminal beyond the fixed free time.
Detention
A detention fee, on the other hand, is charged for holding the cargo outside the terminal after the allocated free time has expired. In other words, when a container is taken out of the terminal and not returning the empty container within the agreed time, a detention fee is applied.
Understanding Demurrage Charges in Malaysia
Demurrage is a control measure to ensure quicker movement of cargo at ports and efficient use of port facilities. Demurrage is charged by the charterer (e.g., a shipping line, railway operator, or trucker) when cargo is not picked up or unloaded within the agreed free time, which the last day of the free allotted time at the terminal, port, or facility. It’s a penalty fee that the charterer paid the owner of the ship as compensation for causing delay in operation.
However, even with this control measure, there are reasons why demurrage charges occur. Here are some common reasons for demurrage charges:
1. Delays in Customs Clearance
Custom clearance issues are one of the reasons for demurrage. Cargo may remain at the port longer than the fixed free time due to the customs inspection process which takes a longer time than expected. In Malaysia, the Royal Malaysian Customs Department (JKDM) is in charge of controlling the importation of goods and collecting customs duties or taxes. A delay could slow down their process of cargo clearance.
2. Documentation Issues
Incorrect documentation or losing documents hold up customs clearance which can result in delays in cargo release, causing it to remain on the port. For example, the common potential documentation issues for Malaysian imports and exports are inaccurate information on commercial invoices and incorrect Harmonized Tariff Schedule (HS) codes.
3. Port Congestion
Busy ports such as Port Klang, could face frequent congestion due to high volume of cargo. As a result, your cargo may be stuck at the port.
4. Weather Conditions
Severe weather conditions, such as storms or monsoon rains can halt operations at the ports in Malaysia. This causes delays in cargo movements.
Fun Fact: Sea freight is one of the most common transports where demurrage occurs due to many handling processes.
How Demurrage is Calculated in Malaysia
Demurrage charges are typically calculated per day and end once the cargo is picked up from the port. The longer your cargo sits at the port, the higher the fees. However, the fees in Malaysia vary depending on the port, region and shipping line. Demurrage is calculated based on:
1. Number of Days Exceeded
Demurrage charges will start being applied once the free time expires. In Malaysia, the typical free period is between 3 to 5 days, which largely depends on the shipping line and type of container. They’re typically calculated per day so the longer the delay, the higher the charges.
2. Rate
Shipping company rates vary as each carrier has its own fee rates and structure for demurrage.
3. Cargo Type
Depending on the type and size of cargo, demurrage rates vary. For example, larger cargoes have higher fees compared to smaller cargoes.
4. Port Location
The location of the port also plays a role in demurrage charges. For instance, the charges at Port Klang could be higher than Kuantan Port as it’s one of the main ports in Malaysia.
Key Factors Leading to Demurrage
There are several key factors that can lead to demurrage. These include:
- Inefficient Scheduling: Late arrival of trucks or a truck is kept waiting beyond the allotted free time causes a delay and leads to demurrage.
- Labor Shortages: A lack of workers at the port can cause a delay in managing shipping containers and thus, lead to demurrage.
- Custom Delays: Prolonged inspections may happen at times, delaying the release or pick up of the cargo. This is why it’s important to have every goods passed.
- Documentation Issues: Documentation issues such as errors, incorrect or incomplete documentation and missing documents are some factors that lead to delays causing demurrage.
- Miscommunication: Demurrage can also occur due to poor communication between shippers, port operators and others during the shipping process. Missed deadlines, incorrect instructions or unclear responsibilities may cause delays leading to demurrage.
Tips to Avoid Demurrage Charges
Businesses should consider the following tips to avoid unnecessary demurrage charges:
1. Plan Ahead
Planning ahead is key to having a smooth operation flow. Businesses can coordinate with carriers, freight forwarding companies and others to ensure smooth cargo movement. Ensure all documentation (e.g., customs clearance) is ready before the cargo arrives.
2. Understand Free Time Limits
Take note of the free time policies of your shipping line and port of destination as free time duration varies with different port terminals.
3. Prepare Documentation in Advance
Prepare all required documents, such as the import and export application, certificate of origin and more, and ensure they are completed accurately before submitting. Be sure to submit them on time.
4. Communicate
Ensure there is effective and regular communication between all parties involved so no one is left out, and ensure to address potential issues early. Clear instructions are key so all who are involved understand and are aware of schedules and deadlines.
5. Track Shipments
To avoid demurrage charges, be sure to use tracking systems to monitor and track your cargo’s status as well as estimated arrival time.
6. Prioritize Customs
Businesses should ensure they understand the process of customs clearance and provide all necessary documents for smooth customs clearance.
7. Partner with Experienced Freight Forwarding Companies
Team up with an experienced freight forwarder that specializes in navigating the complexities of shipping and logistics. They ensure your shipments will move smoothly and efficiently through all stages of the supply chain. This helps reduce the risk of demurrage.
Key Fact: Demurrage is not insured by marine or cargo insurance because it is a commercial or operational cost arising from operation delays, not a loss or damage to the insured goods or assets, and it’s a predictable risk. Learn more about cargo insurance here.
Partner with Global Track Lines for Seamless Shipping Solutions
Demurrage charges are costly and can greatly impact businesses. However, there are ways businesses can implement to avoid unnecessary demurrage charges. Proper planning and communication are some ways to reduce or avoid demurrage. Besides that, another great way for businesses to optimize their supply chain is to partner with a team of professionals!
At Global Track Lines, we offer freight forwarding services in Malaysia, East Malaysia (Sabah and Sarawak) and to any part of the world. We have a team of professionals who are experts in handling a range of logistics services to ensure your supply chain runs smoothly. Global Track Lines will ensure your shipments are handled with care and efficiency so you won’t have to worry about delays or other logistical hurdles. Reach out to us today to learn more about our freight forwarding service in Malaysia.
