For discussion
on 11 December 1998


BACKGROUND

Terminal handling charges (THC) are essentially charges collected by shipping lines to recover from the shippers the cost of paying the container terminals or mid stream operators for the loading or unloading of the containers, and other related costs borne by the shipping lines at the port of shipment or destination. For containers shipped on FOB (Free-On-Board) terms, which most of Hong Kong containers are, the shippers are responsible for paying the THC on the Hong Kong end, while the buyers (consignees) are responsible for paying the freight rate and the THC (or equivalent) on the port of destination. Conversely, Hong Kong importers are responsible for paying the THC for import to Hong Kong. The practice of charging THC is common throughout Asia as much of the rest of the world.

2. Shipping lines used to charge a single rate to cover all shipping and terminal handling and related charges before 1990. Since 1990, most shipping lines have introduced separate charges for the freight rate and THC. The introduction of separate charges for the freight rate and THC was intended to serve two purposes: firstly, it helps to increase the transparency of shipping charges, so that shippers may know how much they are paying to the shipping lines and how much they are paying for the handling of the containers at the port of loading or unloading; secondly, it helps to protect the shipping lines from the fluctuation of currencies, since terminal handling costs charged by terminal operators are usually paid in local currencies, while freight rates are calculated in US dollars.

LINER CONFERENCES

3. In view of the importance of a reliable shipping service to the movement of trade in the world; historically, shipping lines operating in the major trade routes have formed among themselves liner conferences or similar rate discussion agreement organisations to set the freight rates and THC. The objective of this practice of agreeing the freight rate and THC among shipping lines is to stabilise the international shipping market and avoid excessive fluctuation of the freight rates which will be detrimental to international trade.

4. Today, the main liner conferences and rate discussion agreement organisations are Asia North America Eastbound Rate Agreement (ANERA), Far Eastern Freight Conference (FEFC), Transpacific Stabilization Agreement (TSA), Intra Asia Discussion Agreement (IADA). The main difference between the two types of organisations is that the freight rate and THC set by the liner conferences are, in theory, binding on their member shipping lines, while the discussion agreement organisations only recommend the freight rate and THC, and it is up to the individual member shipping lines to negotiate the actual charges with their clients with reference to the recommended rates.

5. It should be noted that not all shipping lines operating in the major trade routes belong to the liner conferences or rate discussion agreement organisations. There are some shipping lines which are not members of such organisations. While these shipping lines, which do not belong to the liner conferences or discussion agreements, very often set their rates with reference to those decided or recommended by liner conference or rate discussion organisations, there remains some degree of competition between conference and non-conference shipping lines.

6. On the other hand, while the rates and THC set by the liner conferences are, in theory, binding; due to intense competition in the international shipping market, the actual rates paid by the shippers are often negotiated between the shippers and the shipping lines and reflect the demand and supply situation and the bargaining powers of the parties concerned. The actual rates collected by shipping lines are confidential commercial information. Nevertheless, the table at Annex A, which is prepared based on market information available, shows the trend of the freight rates and THC in one of the major trading (Asia/Europe) route in the past 10 years.

THC AND FREIGHT RATE TREND

7. As the table at Annex A shows, the total freight cost has dropped by 46% in the last 10 years; but while the freight rate has fallen by 63% over the last 10 years, the THC has increased by 143% since it was first introduced in 1990. The explanation given by the liner conferences for the rapid increase in THC is that when shipping lines first introduced a separate charge for THC in 1990, in order to lessen the impact on the shippers, the rate was set below the actual cost they paid to terminal operators. The rapid increase in THC in subsequent years has partly been due to the catching up effect and partly been due to the increase in the charges of the container terminal operators and other related charges (such as handling, storage and transport of empty boxes) included in the THC calculation.

8. However, as the table at Annex B shows the Hong Kong THC (and to some extent, Shenzhen's too) are higher than the THCs of other ports in the region (except Japan). (The table however should be read with caution because to facilitate comparison all local currencies have been converted into Hong Kong dollars which, to some extent, has＃ widened the difference between the THC in Hong Kong and these places due to recent depreciation of other Asian currencies.) The relative high THC in Hong Kong reflects the level of service offered by the Hong Kong port, market demand and supply, and the comparative higher costs of handling containers in Hong Kong. In respect of high cost of handling containers in Hong Kong, it should be noted that, apart from being one of the most successful ports, Hong Kong is the only major port in the region (and the world) which is fully funded, owned and managed by the private sector with no direct or indirect government subsidy. The charges of the terminal operators or mid stream operators therefore have to reflect the full commercial costs of the business and it may not be appropriate to compare their costs and charges with the costs and charges in other ports in the region. But having said that, because shipping lines do not have the practice of disclosing the details of the basis of their THC, there remains an ongoing concern among Hong Kong shippers that they are being over charged.

CONCLUSION

9. To address the concern of shippers while respecting that THC is a commercial issue between the shippers and shipping lines, the Economic Services Bureau has been liaising closely with the shippers and liner conference representatives to seek to improve transparency and consultation between the shipping lines and the shippers in the setting of THC. The objective is, through better liaison and consultation, to encourage both parties to work out a better mechanism for the determination of THC, so that shippers can have a better understanding of the basis of THC, and be given sufficient advance notice of any proposed revision of THC so that they can make arrangement to lessen the impact.

10. Separately, the Government is working closely with the terminal operators to seek to improve efficiency and lower their cost of operation. This includes exploring the possibility of improving the layout of the existing terminals and providing terminal operators with more backup land to increase their handling capacity, dredging of the Rambler Channel to enable the terminals to handle the larger container vessels, the building of Container Terminal 9 to provide additional handling capacity and increase market competition, closer liaison with the Shenzhen authorities to improve cross boundary movement of container trucks, and promoting river trade to expand the catchment area of the Hong Kong container port and lower the cost of transporting containers between the Pearl River Delta and Hong Kong.

11. The Government will continue to work with all parties concerned in the container freight industry to identify measures to lower the cost of handling containers in Hong Kong and the THC paid by shippers in Hong Kong.


Economic Services Bureau
December 1998

Annex A

English version not yet available
Please refer to Chinese version

Annex B

English version not yet available
Please refer to Chinese version