Sea freight: containers, dry bulk, tankers and the Incoterms terminology

What sea freight rates are and why they matter

The freight rate is what is paid to a carrier to move goods by sea. More than 80% of world trade by volume travels by ship, and raw materials almost entirely: iron ore and coal in bulk, oil and gas in tankers, refined metals, semi-finished products and scrap often in containers. Freight is therefore a structural component of the landed cost, the cost of the goods once they reach the port or plant of destination.

Its weight varies with the goods and the moment. On a tonne of copper at 9,000 dollars, a container rate of 100 dollars per tonne is little more than 1%; on a tonne of scrap, bauxite or coal freight can be a third of the price. And in crises freight moves on its own: during the pandemic and in 2024, with ships diverted from the Red Sea around the Cape of Good Hope, container rates multiplied within months while commodity prices stood still. That is why freight is followed as a market of its own.

Containers: World Container Index, SCFI, FBX

Container transport is measured per unit of load: the 20-foot container (TEU) and the 40-foot one (FEU). The international reference is the Drewry World Container Index (WCI): every Thursday Drewry assesses spot rates on eight major East-West routes, Shanghai to Rotterdam, Genoa, Los Angeles and New York, the backhauls Rotterdam-Shanghai and Los Angeles-Shanghai, plus the two transatlantic routes Rotterdam-New York and New York-Rotterdam, and summarises them in a composite index in dollars per 40-foot container. FT Mercati publishes it every week, composite and eight routes, with the history.

Two other widely followed indices sit next to the WCI. The Shanghai Containerized Freight Index (SCFI), published every Friday by the Shanghai Shipping Exchange, measures spot rates from Shanghai to a dozen destinations, in dollars per TEU to Europe and per FEU to the United States: the thermometer of Chinese exports. The Freightos Baltic Index (FBX) is daily and comes from bookings on the Freightos platform. The three indices tell the same story with different nuances: the WCI is the most used in European contracts.

What moves container freight

The container rate is a price of capacity: it rises when available ships are fewer than the goods to load, it falls when carriers sail with empty slots. On the supply side count orders of new ships, blank sailings with which carriers remove capacity, port congestion keeping ships in queues, and the choke points: the Suez Canal blockage in March 2021, the Panama Canal drought in 2023-2024, the diversion from the Red Sea around Africa from 2024, which added two weeks to the Asia-Europe route and absorbed capacity.

On the demand side count seasonality (the peak season before Western holidays), distributors' inventory cycles and demand spikes after a tariff announcement. On top of the base rate come surcharges: the bunker adjustment factor (BAF) for fuel, peak-season and congestion surcharges, terminal handling charges (THC). When comparing an offer with the index one must know which surcharges it includes.

Dry bulk: the Baltic Dry Index

Iron ore, coal, bauxite and alumina, grain, fertilisers, scrap: heavy raw materials travel loose in the holds of bulk carriers, and their freight is measured in dollars per day of hire (time charter) or in dollars per tonne carried on a route (voyage charter). The world reference is the Baltic Dry Index (BDI) of the Baltic Exchange in London, published every working day: since 2018 it is the weighted average of the time-charter rates of the three main classes, 40% Capesize, 30% Panamax, 30% Supramax, expressed in points.

Vessel classes tell which cargo and which route. Capesizes, above 150,000 tonnes deadweight, are the iron-ore and coal ships between Australia, Brazil and China; Panamaxes, 65-85,000 tonnes, carry coal, grain and bauxite; Supramaxes, 50-65,000, and Handysizes, below 40,000, serve smaller ports and cargoes such as scrap, cement, fertilisers. A rising BDI anticipates higher costs for steelworks and alumina refineries, which buy ore on a CIF basis; a falling BDI tells of weak Chinese demand before steel prices do.

Oil and gas: tankers and the Worldscale scale

Crude oil travels on tankers classified by size: VLCCs (Very Large Crude Carriers), about 300,000 tonnes deadweight and two million barrels, on the long routes from the Persian Gulf to Asia and the United States; Suezmaxes, about one million barrels, sized for the Suez Canal; Aframaxes, 600-800,000 barrels, on regional routes. Refined products (gasoline, diesel, jet) use smaller ships: MR (Medium Range, about 50,000 tonnes) and LR1 and LR2 (Long Range).

Tanker rates have a convention of their own: the Worldscale scale. For every route the Worldscale association publishes once a year a base rate in dollars per tonne (the flat rate, which equals WS100) calculated on the standard costs of the voyage; the market then quotes freight as a percentage of that base: WS60 means 60% of the flat rate, WS150 means 150%. To compare different ships and routes operators translate everything into TCE (time charter equivalent), i.e. dollars per day. The Baltic Exchange summarises the market in the Baltic Dirty Tanker Index (crude) and the Baltic Clean Tanker Index (products).

Gas has ships and rates of its own. LNG carriers transport liquefied gas at -162 °C in tanks of about 174,000 cubic metres on modern vessels, and are chartered in dollars per day, on the spot market or under multi-year contracts tied to liquefaction projects. LPG carriers, the VLGCs of about 84,000 cubic metres, link the Persian Gulf and the United States to Asia, with rates quoted in dollars per tonne on the Baltic Exchange reference routes.

The Incoterms 2020 terminology: who pays freight and where risk passes

Incoterms are the eleven rules of the International Chamber of Commerce (ICC) which, when referenced in a sales contract, establish who arranges and pays transport, insurance and customs formalities, and at which point the risk of loss or damage passes from seller to buyer. The edition in force is the 2020 one. Seven rules apply to any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four only to sea and inland waterway transport (FAS, FOB, CFR, CIF).

For raw-material buyers three points matter most. First: FOB, CFR and CIF are designed for goods loaded loose on board, with risk passing when the goods are on board the vessel; for containerised goods, delivered to the terminal days before loading, the ICC recommends FCA, CPT and CIP. Second: CIF and CIP oblige the seller to insure, but with different covers, minimum (Clauses C) under CIF and wide (Clauses A) under CIP. Third: metal premiums are almost always quoted CIF at the port of arrival (for example CIF Rotterdam), i.e. freight and insurance included up to the port but duties excluded, while an FOB port-of-departure price leaves freight to the buyer.

From freight to landed cost: an example

The landed cost of a lot is built by adding to the price of the goods the items the Incoterm leaves to the buyer. An example with illustrative numbers: 25 tonnes of ingots in a 40-foot container bought FOB Shanghai at 2,500 dollars per tonne; with the WCI Shanghai-Genoa at 3,000 dollars per container, freight weighs 120 dollars per tonne, 4.8% of the price; if freight rises to 6,000 dollars, as in the 2024 peaks, it weighs 240 dollars per tonne, 9.6%. Then come insurance, port charges, duty and, from 2026 for steel and aluminium, the CBAM.

The practical lesson is twofold. When comparing offers under different Incoterms, they must first be brought to the same delivery point; when signing a multi-year supply contract, it pays to state how the transport component is updated, for example by indexing it to the WCI of the relevant route, instead of leaving it implicit in a CIF price the supplier will renegotiate alone.

Freight on FT Mercati

FT Mercati publishes every week the Drewry World Container Index, composite index and eight routes, with the full history of the series: on the sea freight page and on the platform, alongside LME quotations, premiums, exchange rates and fundamental data, where the official freight transport statistics complete the picture.

With freight, premium and exchange rate on the same screen, the landed price of a metal can be read in full: the exchange, the cost of having it physically on the regional market, the voyage and the currency.