Ocean Freight: Why the Lowest Quote May Not Be Your Best Choice

Have you ever experienced this?

You request quotations from three freight forwarders, and each comes in cheaper than the last. You select the lowest-priced option, only to end up with a final bill higher than the most expensive proposal.

Why is this? Ocean freight is far more than a single number. Some forwarders earn their margin on base freight, while others rely heavily on surcharges.

1. What Makes Up Ocean Freight Costs?

Many shippers assume ocean freight is simply the rate charged by carriers. This is not the case. Your total ocean freight cost consists of at least two key components: Base Ocean Freight + Surcharges.

Base Ocean Freight

This is the core carrier charge for moving cargo from origin port to destination port, and typically represents the largest line-item on your quotation. Carriers set this rate based on trade lane conditions, space availability and market sentiment.

Surcharges: The Hidden Cost Drivers

Surcharges are what make freight quotes look complicated. Common surcharges include:

- THC (Terminal Handling Charge): Charges for container loading, unloading and handling at terminals, applied at both origin and destination ports.

- BAF / FAF (Bunker Adjustment Factor / Fuel Adjustment Factor): Fuel-related surcharge adjusted by carriers monthly or quarterly to reflect fluctuating oil prices.

- PSS (Peak Season Surcharge): A seasonal charge implemented by carriers during peak shipping periods in the second half of each year.

- GRI (General Rate Increase): Announced general freight rate hikes, usually published one week in advance.

- ORC (Origin Receipt Charge): Origin-specific fee mainly applicable to South & East China ports such as Shenzhen and Guangzhou.

- CAF (Currency Adjustment Factor): Surcharge to offset currency exchange volatility risks.

- Suez Canal / Panama Canal Surcharges: Applied for transiting these key waterways, covering tolls and rerouting expenses.

Key takeaway: In many cases, accumulated surcharges can exceed base ocean freight. Individual surcharges may seem small, yet combined they can lead to substantial total costs.

2. How Do Carriers Set Freight Rates?

Ocean freight pricing is not simply cost-plus-profit. At its core, it is driven by supply and demand.

Carrier container space works much like airline tickets: discounted rates in off-peak seasons and steep increases when demand surges. Rates rise when cargo volume outstrips vessel capacity and fall when there is excess space.

GRI (General Rate Increase)

Carriers issue GRI announcements to notify planned rate increases per TEU/FEU for specific trade lanes, effective on a defined date. Note that a published GRI does not guarantee full implementation. Actual spot rates still depend on real-time market supply and demand. An announced USD 500 per container increase may only materialise as USD 200 in real transactions.

FAK vs Contract Rates

- FAK (Freight All Kinds): Flat spot rate regardless of commodity type. Ideal for small-to-medium shippers with inconsistent shipment volumes.

- Contract Rate: Long-term negotiated rate for large-volume shippers, with fixed or floating price bands subject to minimum volume commitments.

Why do quotes vary so widely?

Different carriers adopt distinct pricing strategies for the same trade lane. Some operate direct services with transparent pricing yet limited flexibility; others work via agent networks which may create multi-layer mark-ups. Service quality, transit time and transhipment schedules also differ significantly. The cheapest offer is not always the most cost-effective, nor is the highest-priced one always wasteful.

3. Three Market Factors Pushing Up Freight Rates in August

Since early August, geopolitical tensions in the Middle East have intensified. Ballistic missile attacks on Saudi oil tankers and threats to southern Red Sea shipping lanes have forced multiple vessels to divert or turn back.

Current freight market conditions are shaped by overlapping major events:

1. Escalating Red Sea Crisis: Ongoing threats to Red Sea shipping force most carriers to reroute via the Cape of Good Hope. Rerouting adds 10-15 days transit time and raises fuel costs by 15-20%. These extra expenses are passed on to shippers mainly via BAF and other surcharges.

2. Strong US Lane Rate Rebound: US West Coast spot rates climbed 12.5% by late July, driven by pre-peak season demand, restocking activities and tariff expectations, resulting in tightening vessel space.

3. Persistent Panama Canal Drought: Draft restrictions continue at the Panama Canal, requiring container vessels to reduce cargo load. New draft-related surcharges have been introduced by CMA CGM, Hapag-Lloyd and MSC this year.

In short, today’s ocean freight rates are driven by base freight plus multiple surcharges. Published quotations are subject to month-over-month market changes.

4. Practical Tips for Shippers & Foreign Trade Practitioners

1. Review line-items, not only total price

Avoid comparing total price in isolation. Check base freight, THC, PSS, GRI, ORC and all other surcharges line-by-line. Some forwarders undercut base freight while adding hidden surcharges, resulting in a higher final cost.

2. Lock space or wait for market movement

If your cargo is confirmed and rates fit your budget, lock in space promptly. During peak seasons, rates tend to go up. Holding off for further price drops may cost you preferred vessel space. If shipment timing is flexible, you may monitor market movement for 1-2 weeks to observe whether announced GRI measures take full effect.

3. Choose between FAK and contract rates

Shippers with stable monthly volume of 10 containers or more are recommended to negotiate contract rates with carriers or top consolidators for better pricing. For shippers with irregular, ad-hoc shipments, FAK spot rates offer greater flexibility without minimum-volume obligations.

4. Negotiate with freight forwarders wisely

Price is not everything. Service reliability, space guarantee and issue-resolution capability are intangible values often more important than freight differences. Compare multiple quotations but avoid chasing the absolute lowest price. Offers far below reasonable market ranges often come with hidden costs or compromised service. Build long-term partnerships with trusted forwarders; consistent shippers typically receive priority space and favourable terms.

If you are facing freight-related challenges or would like to discuss cost-efficient shipping solutions for your trade lanes, please feel free to reach out to our team.