Demurrage Charges in Shipping: What Importers and Shipowners Need to Know

In the world of shipping, time is extremely important. Every delay can lead to added costs, which is where the concept of “demurrage” comes into play. Demurrage is a common term in shipping and logistics that both importers and shipowners should fully understand. 

This guide will explain what demurrage charges are, how they work, and what both importers and shipowners need to know to avoid these extra costs. Let’s make it as simple as possible.

What is Demurrage?

Demurrage is a fee charged when there is a delay in loading or unloading a ship’s cargo. When containers arrive at a port, there is a set number of days allowed for them to be unloaded (this time is called “free time”). If the importer or ship owner fails to unload the cargo within the given time, they must pay demurrage charges for the extra days the containers remain at the port. These fees increase daily until the cargo is moved.

How Does Demurrage Work?

When goods are shipped, a contract called a “charter agreement” is signed between the shipowner and the charterer (the person or company responsible for the cargo). This agreement outlines the rules, including the time allowed for loading and unloading.

Once the ship reaches the port, the containers are unloaded and placed in the storage yard. The customs department will check the cargo, and the containers can be stored for a certain number of days without any charge. This is known as “free time.”

However, if the cargo is not moved from the port to its next destination (such as a warehouse) within the agreed free time, demurrage charges start to apply. These charges are usually calculated daily, and the longer the delay, the higher the costs.

Why Do Demurrage Charges Exist?

Demurrage charges are meant to encourage the quick loading and unloading of ships, ensuring that containers do not sit in storage for too long. Ports are busy places with limited space, and ships need to stay on schedule. By charging demurrage, port authorities and shipping companies ensure that cargo is handled efficiently, keeping everything moving smoothly. These charges are designed to cover the cost of using the port’s space and encourage businesses to avoid delays.

Who Pays for Demurrage?

Both shipowners and importers can be responsible for demurrage charges, depending on the situation:

• For Importers: If an importer does not pick up the cargo from the port in time, they will have to pay demurrage charges. This usually happens when customs clearance takes too long or there are other delays in the supply chain.
• For Shipowners: Shipowners may also face demurrage charges if they fail to load or unload the cargo within the allowed free time. For example, if their ship is delayed due to port congestion or other reasons, they may be responsible for paying demurrage.

How Are Demurrage Charges Calculated?

Demurrage charges are usually calculated based on the number of extra days the cargo remains in the port after the free time has expired. The rate is multiplied by the number of containers and the number of extra days.

Here’s an example of how demurrage is calculated:

• Free days allowed: 7 days
• Number of containers: 5 containers
• Demurrage rate: $20,000 per day per container
• Extra days: 6 days (plus 8 hours 30 minutes)

Now, to calculate the demurrage charge, the formula would be:

Demurrage Payable = Rate × Number of Containers × Extra Days

So, the charge is:

$20,000 × 5 containers × 6.35 days = $635,420

This is how demurrage charges can quickly add up and become very costly.

Why Is Demurrage Levied?

Ports and shipping companies impose demurrage charges for several reasons:

1. To manage space: Ports are often crowded, and containers need to be moved quickly to make room for new cargo.
2. To encourage fast turnaround: Shipping companies and port authorities want to ensure that containers are not taking up space unnecessarily.
3. To compensate for the use of containers: Containers are valuable resources. If importers or exporters do not return them in time, they cannot be used for other shipments, leading to losses for shipping companies.

Differences Between Demurrage and Detention

It’s easy to confuse demurrage with detention, but they are slightly different.

• Demurrage applies when containers are still at the port and have not been moved within the free time allowed.
• Detention applies when the containers have been taken out of the port (for example, to a warehouse) but are not returned to the shipping company within the agreed time.

Essentially, demurrage is for containers that stay too long at the port, while detention is for containers that are not returned on time after leaving the port.

How to Avoid Demurrage Charges

To avoid these extra costs, both importers and shipowners need to take steps to ensure the smooth handling of cargo. Here are some tips:

1. Plan ahead: Carefully plan the cargo’s journey, including all loading and unloading steps, to make sure there is enough time to clear customs and transport the containers.
2. Read the contract carefully: Make sure to go through the charter agreement thoroughly. This will help both the importer and shipowner understand the free time allowed and avoid any misunderstandings.
3. Prepare documents in advance: Delays often occur because paperwork is not ready. Make sure all customs and shipping documents are prepared ahead of time to avoid any hold-ups.
4. Communicate with all parties: Stay in close contact with the shipper, carrier, customs authorities, and anyone else involved in the process to avoid delays.
5. Use a freight forwarder: Hiring an experienced freight forwarder can help speed up the process and minimize the risk of incurring demurrage charges.
6. Negotiate extra free days: If you anticipate that unloading or customs clearance will take longer, it’s a good idea to negotiate for additional free days with the shipping company or port authorities beforehand.

Example of How Demurrage Costs Can Overtake Cargo Value

One important point to note is that sometimes, demurrage costs can become so high that they exceed the value of the goods being imported. In such cases, importers may be forced to abandon the cargo altogether, as the demurrage charges make it financially unviable to retrieve the shipment.

For example, if the demurrage charges continue to accumulate for a prolonged period and exceed the value of the cargo, the importer might find it cheaper to leave the shipment at the port instead of paying the high fees to retrieve it.

Important Considerations Regarding Demurrage Charges

• Type of Container: The type of container being used (dry container, refrigerated container, chassis, etc.) can influence the demurrage charges. Different types of containers have different rates.
• Location: Demurrage charges can vary by country and port. Shipping lines also have their own rates and policies, making it important to understand the specific rules at the port of destination.
• Per-Day and Per-Container: Demurrage is calculated on a per-container and per-day basis. If you are shipping multiple containers, the costs can add up quickly.

Also Read: Guide to Shipping Internationally From India to Other Countries

Conclusion

Demurrage charges are an important factor in the shipping industry, and both importers and shipowners should take steps to understand how they work. By managing time efficiently, reading contracts carefully, and staying organized, it is possible to avoid these unnecessary costs.

Understanding the difference between demurrage and detention, preparing for delays, and negotiating for extra free time are all key strategies that can help you avoid demurrage charges in the future. Remember, time is money when it comes to shipping, and a little planning can save a lot of cost.

Also Read: Shipping Guarantees in Import-Export: Understanding Meaning, Process, and Examples