Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

2016
SURABAYA
FINAL REPORT

PT. ITS Kemitraan

for Indonesian Export Products
Evaluating the Shift in Incoterms
Preface

T
he Ministry of Trade (MoT) of Republic of Indonesia has requested the
support of the World Bank in devising new and improve trade related
policies for the benefit of the Indonesian economy. The MoT - with the
help of the World Bank - has identified a number of areas where there is a need
to fill knowledge gaps in order to inform policy-making.
One of the identified areas is promoting “beyond cabotage” under the assump-
tion that changing term of delivery from FOB to CIF will promote the Indonesian-
flag vessels which in turn the Indonesian economy will be benefited. To that end
the World Bank has mandated PT. ITS Kemitraan to develop a study on evaluat-
ing the shift in term of delivery from FOB to CIF for Indonesian export products
under the supervision of World Bank staff. The study should evaluate four com-
modities, such as Crude Palm Oil (CPO), coal, rubber and shrimp, where these
commodities are known as the main Indonesian export products.
This study aims to evaluate the shift in terms of delivery on four key export com-
modities as well as to explore the advantages and disadvantages of changing the
terms of delivery. Due to difference in characteristics of each export product,
then we present the analysis based on the commodity. Overall, we also provide
conclusion and recommendation in accordance with the entire analysis results.
On behalf of all partners, we would like to thank for your cooperation and
contribution. We wish you a good reading of this final report. We look forward
to receiving the positive comments and the valuable feedbacks to improve the
results of this study.

Surabaya, December 2016

PT. ITS Kemitraan

iii
Contents

Preface iii

Nomenclature 1

Explanatory Notes 3

1 Introduction 5
1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.3 Scope of Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.4 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

2 Basic Concepts 11
2.1 Incoterms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1.1 An Overview of Incoterms . . . . . . . . . . . . . . . . . . 11
2.1.2 Incoterms in Indonesia . . . . . . . . . . . . . . . . . . . . 15
2.2 Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2.1 Shipping Services . . . . . . . . . . . . . . . . . . . . . . . 17
2.2.2 Ship Types . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.2.3 Freight Market . . . . . . . . . . . . . . . . . . . . . . . . 22
2.2.4 Required Freight Rate . . . . . . . . . . . . . . . . . . . . 24
2.2.5 Shipping Market in Indonesia . . . . . . . . . . . . . . . . 25

3 Crude Palm Oil 27

3.1 Commodity Market . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.1.1 Palm Oil Industry in Indonesia . . . . . . . . . . . . . . . 27
3.1.2 Production of Palm Oil . . . . . . . . . . . . . . . . . . . . 29
3.1.3 Indonesian CPO Export . . . . . . . . . . . . . . . . . . . 30
3.1.4 Global Market Share . . . . . . . . . . . . . . . . . . . . . 31
3.1.5 Port of Export . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.1.6 Main Importing Countries . . . . . . . . . . . . . . . . . . 34
3.1.7 Existing Terms of Delivery . . . . . . . . . . . . . . . . . . 34
3.2 Shipping Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2.1 Ship Type . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.2.2 Indonesian Fleet Availability . . . . . . . . . . . . . . . . . 37
3.2.3 Shipments of Indonesian CPO . . . . . . . . . . . . . . . . 38
3.3 Evaluation of Shifting ToD . . . . . . . . . . . . . . . . . . . . . . 39
3.3.1 Basic Calculation . . . . . . . . . . . . . . . . . . . . . . . 39

v
Contents

3.3.2 Further Calculation . . . . . . . . . . . . . . . . . . . . . . 46

3.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

4 Coal 51
4.1 Commodity Market . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.1.1 Coal Industry in Indonesia . . . . . . . . . . . . . . . . . . 51
4.1.2 Production of Coal . . . . . . . . . . . . . . . . . . . . . . 52
4.1.3 Indonesian Coal Export . . . . . . . . . . . . . . . . . . . 54
4.1.4 Global Market Share . . . . . . . . . . . . . . . . . . . . . 55
4.1.5 Ports of Export . . . . . . . . . . . . . . . . . . . . . . . . 55
4.1.6 Main Importing Countries . . . . . . . . . . . . . . . . . . 56
4.1.7 Existing Terms of Delivery . . . . . . . . . . . . . . . . . . 57
4.1.8 Coal Benchmark Price . . . . . . . . . . . . . . . . . . . . 57
4.2 Shipping Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
4.2.1 Ship Type . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
4.2.2 Indonesian Fleet Availability . . . . . . . . . . . . . . . . . 60
4.2.3 Shipments of Indonesian Coal . . . . . . . . . . . . . . . . 62
4.3 Evaluation of Shifting ToD . . . . . . . . . . . . . . . . . . . . . . 63
4.3.1 Basic Calculation . . . . . . . . . . . . . . . . . . . . . . . 63
4.3.2 Further Calculation . . . . . . . . . . . . . . . . . . . . . 68
4.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

5 Rubber 73
5.1 Commodity Market . . . . . . . . . . . . . . . . . . . . . . . . . . 73
5.1.1 Rubber Industry in Indonesia . . . . . . . . . . . . . . . . 73
5.1.2 Production of Rubber . . . . . . . . . . . . . . . . . . . . . 74
5.1.3 Indonesian Rubber Export . . . . . . . . . . . . . . . . . . 75
5.1.4 Global Market Share . . . . . . . . . . . . . . . . . . . . . 76
5.1.5 Ports of Export . . . . . . . . . . . . . . . . . . . . . . . . 77
5.1.6 Main Importing Countries . . . . . . . . . . . . . . . . . . 77
5.1.7 Existing Terms of Delivery . . . . . . . . . . . . . . . . . . 78
5.1.8 Rubber Benchmark . . . . . . . . . . . . . . . . . . . . . . 78
5.2 Shipping Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
5.2.1 Ship Type . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
5.2.2 Indonesian Fleet Availability . . . . . . . . . . . . . . . . . 81
5.2.3 Shipments of Indonesian Rubber . . . . . . . . . . . . . . 81
5.3 Evaluation of Shifting ToD . . . . . . . . . . . . . . . . . . . . . . 83
5.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

6 Shrimp 91
6.1 Commodity Market . . . . . . . . . . . . . . . . . . . . . . . . . . 91
6.1.1 Shrimp Industry in Indonesia . . . . . . . . . . . . . . . . 91
6.1.2 Production of Shrimp . . . . . . . . . . . . . . . . . . . . 92
6.1.3 Indonesian Shrimp Export . . . . . . . . . . . . . . . . . . 93
6.1.4 Global Market Share . . . . . . . . . . . . . . . . . . . . . 94
6.1.5 Ports of Export . . . . . . . . . . . . . . . . . . . . . . . . 95

vi
 Contents

6.1.6 Main Importing Countries . . . . . . . . . . . . . . . . . . 96

6.1.7 Existing Terms of Delivery . . . . . . . . . . . . . . . . . . 97
6.2 Shipping Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
6.2.1 Ship Type . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
6.2.2 Indonesian Fleet Availability . . . . . . . . . . . . . . . . . 99
6.2.3 Shipments of Indonesian Shrimp . . . . . . . . . . . . . . 99
6.3 Evaluation of Shifting ToD . . . . . . . . . . . . . . . . . . . . . . 100
6.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

7 The Impacts on Shifting the Terms of Delivery 105

8 Conclusion and Recommendation 107

8.1 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
8.2 Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Bibliography 109

vii
List of Figures

Figure 1.1 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Figure 2.1 Incoterms Rules for All Modes of Transport . . . . . . . . . . 14

Figure 2.2 Incoterms Rules for Sea and Inland Waterway Transport . . . 15
Figure 2.3 Proportion of Incoterms in Indonesia . . . . . . . . . . . . . . 16
Figure 2.4 The Commercial Shipping Fleet Classification . . . . . . . . . 20
Figure 2.5 The Components of Shipping Costs . . . . . . . . . . . . . . . 23
Figure 2.6 Costs Distribution on Freight Market Transaction . . . . . . . 24
Figure 2.7 Increasing the Number of Indonesian-Flag Vessels . . . . . . . 25
Figure 2.8 The Composition of Indonesian-Flag Vessels by Unit . . . . . 26

Figure 3.1 CPO Supply Chain in Indonesia . . . . . . . . . . . . . . . . . 28

Figure 3.2 Palm Oil Plantation in Indonesia, by ownership . . . . . . . . 28
Figure 3.3 Growth of Palm Oil Plantation Area in Indonesia . . . . . . . 29
Figure 3.4 The Growth of Palm Oil Production and Consumption . . . . 29
Figure 3.5 Comparison between Palm Oil Export and CPO Export . . . . 30
Figure 3.6 Indonesian Export Commodities by Sectors (billion $) . . . . 30
Figure 3.7 Top Five Indonesian Export Products . . . . . . . . . . . . . . 31
Figure 3.8 Global Market Share of Palm Oil Products in 2015 . . . . . . 32
Figure 3.9 The Proportion of Main Ports of Export . . . . . . . . . . . . . 33
Figure 3.10 The Implementation of Incoterms for Indonesian CPO Export 34
Figure 3.11 Demand and Forecast of Chemical Products . . . . . . . . . . 36
Figure 3.12 Trend of Global Chemical Tanker . . . . . . . . . . . . . . . . 36
Figure 3.13 Global Operators of Chemical Tanker . . . . . . . . . . . . . . 37
Figure 3.14 Proportion of Tanker Ships in Indonesia . . . . . . . . . . . . 38
Figure 3.15 Shipment of Indonesian CPO by Size of Ships . . . . . . . . . 39
Figure 3.16 The Big Five Flag States for Indonesian CPO Export . . . . . . 39
Figure 3.17 Seller and Buyer Responsibilities in FOB and CIF . . . . . . . 40
Figure 3.18 Selected Route of CPO for a Case Study . . . . . . . . . . . . 40

Figure 4.1 Coal Supply Chain[1] . . . . . . . . . . . . . . . . . . . . . . 52

Figure 4.2 Indonesian Coal Resources[7] . . . . . . . . . . . . . . . . . . 52
Figure 4.3 Indonesian Coal Production, Export and Domestic Consump-
tion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Figure 4.4 Indonesian Export Commodities by Sectors . . . . . . . . . . 54
Figure 4.5 Proportion of Coal on the Total Export of Indonesia by Vol-
ume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Figure 4.6 The Implementation of Incoterms for Indonesian Coal Export 57

ix
List of Figures

Figure 4.7 Average Coal Price Per Year (2012-2016) . . . . . . . . . . . 58

Figure 4.8 Demand of Dry Bulk Carrier in Volumes . . . . . . . . . . . . 60
Figure 4.9 Trend of Global Dry Bulk Carrier . . . . . . . . . . . . . . . . 60
Figure 4.10 Coal Transportation for Export . . . . . . . . . . . . . . . . . 61
Figure 4.11 Type of Indonesian-flag Vessel for Coal . . . . . . . . . . . . . 61
Figure 4.12 Shipment of Indonesian Coal by Size of Ships . . . . . . . . . 62
Figure 4.13 The Big Five Flag States for Indonesian Coal Export . . . . . . 63
Figure 4.14 Selected Routes of Coal for Case Study . . . . . . . . . . . . . 64

Figure 5.1 Natural Rubber Supply Chain . . . . . . . . . . . . . . . . . . 74

Figure 5.2 Indonesian Rubber Resources . . . . . . . . . . . . . . . . . . 74
Figure 5.3 Indonesian Rubber Production Sites by Province . . . . . . . 75
Figure 5.4 Indonesian Export Commodities by Sectors (value in billion $) 75
Figure 5.5 TSR 20 and RSS3 Price Vs. Crude Oil Price . . . . . . . . . . 79
Figure 5.6 Container Ship Demolition Activity . . . . . . . . . . . . . . . 80
Figure 5.7 Container Supply Growth . . . . . . . . . . . . . . . . . . . . 80
Figure 5.8 National Container Fleet by Size (TEU) . . . . . . . . . . . . 81
Figure 5.9 Direct and Transshipment Shipment of Container . . . . . . . 82
Figure 5.10 The Five Biggest Flag States for Indonesian Container Export 83
Figure 5.11 Shanghai Containerized Freight Index . . . . . . . . . . . . . 84

Figure 6.1 Shrimp Supply Chain . . . . . . . . . . . . . . . . . . . . . . 91

Figure 6.2 Indonesian Aquaculture and Wild Shrimp Resources . . . . . 92
Figure 6.3 Indonesian Shrimp Production, Export and Domestic Con-
sumption (White-leg Shrimp and Giant Tiger Shrimp) . . . . 93
Figure 6.4 Indonesian Export Commodities by Sectors (value in billion $) 93
Figure 6.5 Global Market Share of Shrimp Aquaculture in Major Farm-
ing Nations in Asia[10] . . . . . . . . . . . . . . . . . . . . . 95
Figure 6.6 The Proportion of Existing Terms of Delivery . . . . . . . . . 97
Figure 6.7 Direct and Transshipment Shipment of Container (Origin:
Tanjung Perak) . . . . . . . . . . . . . . . . . . . . . . . . . . 99

x
List of Tables
Table 2.1 Classifications or Rules in Incoterms 2010 . . . . . . . . . . . . 12
Table 2.2 Characteristics between Liner and Tramp Shipping . . . . . . . 19

Table 3.1 Top Five Exporting Countries . . . . . . . . . . . . . . . . . . . 32

Table 3.2 Ports of Export for Indonesian CPO by Shipment . . . . . . . . 33
Table 3.3 Importing Countries of Indonesian CPO by Volume . . . . . . . 34
Table 3.4 Number of Indonesian-Flag Tanker by Size . . . . . . . . . . . 38
Table 3.5 Port of Selabak Main Facilities . . . . . . . . . . . . . . . . . . 41
Table 3.6 Port Klang Main Facilities . . . . . . . . . . . . . . . . . . . . . 42
Table 3.7 Ship Specification in the Case Study . . . . . . . . . . . . . . . 42
Table 3.8 Freight Information for Base Calculation . . . . . . . . . . . . 43
Table 3.9 Port and Cargo Handling Charges in Port of Selabak . . . . . . 44
Table 3.10 Port Charges and Cargo Handling Charges in Port Klang . . . . 45
Table 3.11 Calculated Freight for One Voyage . . . . . . . . . . . . . . . . 46
Table 3.12 Potential Freight for CPO in Voyage Charter and Time Charter 49

Table 4.1 Total Value Top Five Exporting Countries . . . . . . . . . . . . 55

Table 4.2 Total Volume of Top Five Exporting Countries . . . . . . . . . . 55
Table 4.3 Ports of Export for Indonesian Coal by Shipment . . . . . . . . 56
Table 4.4 Top Five Importing Countries of Indonesian Coal by Volume . 56
Table 4.5 Port of Samarinda Main Facilities . . . . . . . . . . . . . . . . 64
Table 4.6 Port of Guangzhou Main Facilities . . . . . . . . . . . . . . . . 65
Table 4.7 Specifications of Ship Used in Coal Case Study . . . . . . . . . 65
Table 4.8 Freight Information for Base Calculation . . . . . . . . . . . . 66
Table 4.9 Port and Cargo Handling Charges in Port of Samarinda . . . . 67
Table 4.10 Port and Cargo Handling Charges in Port of Guangzhou . . . . 67
Table 4.11 Calculated Freight for One Voyage . . . . . . . . . . . . . . . . 68
Table 4.12 Potential Freight for Coal in Voyage Charter and Time Charter 71

Table 5.1 Total Value Top Five Exporter Countries . . . . . . . . . . . . . 76

Table 5.2 Total Volume of Top Five Exporter Countries . . . . . . . . . . 76
Table 5.3 Port of Export for Indonesia’s Rubber by Volume . . . . . . . . 77
Table 5.4 Top Five Importing Countries of Indonesian Rubber by Volume 78
Table 5.5 Container Freight Rates from Indonesia to Main Importing
Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Table 5.6 Potential Freight for Rubber . . . . . . . . . . . . . . . . . . . 86

Table 6.1 Port of Export for Indonesia’s Giant Tiger Shrimp by Volume . 95
Table 6.2 Port of Export for Indonesia’s White-leg Shrimp by Volume . . 96

xi
List of Tables

Table 6.3 Top Five Importing Countries of Indonesian Shrimp by Volume 96

Table 6.4 Reefer Container Freight Rates from Indonesia to Main Im-
porting Countries . . . . . . . . . . . . . . . . . . . . . . . . . 101
Table 6.5 Potential Freight for Shrimp . . . . . . . . . . . . . . . . . . . 102

xii
Nomenclature
Buyer : a person who makes a purchase (importer,
consignee)
CIF : Cost, Insurance and Freight
CFR : Cost and Freight
CPO : Crude Palm Oil
FAS : Free Alongside Ship
Flag of : registry of a merchant ship under a foreign-flag
Convenience in order to profit from less restrictive regulations
FOB : Free on Board
FOC : Flag Of Convenience
Foreign-flag vessel : a vessel having a registry under a nationality
other than Indonesia
HSD : High Speed Diesel
Indonesian-flag : ship registered under Indonesia’s regulation
vessel
LWS : Low Water Spring
MFO : Marine Fuel Oil
MoT : Ministry of Trade of the Republic of Indonesia
Nm : Nautical miles
RFR : Required Freight Rate
SFOC : Specific Fuel Oil Consumption
T/C : Time Charter
TCH : Time Charter Hire
ToD : Terms of Delivery
V/C : Voyage Charter
Seller : a person who sells something (exporter, shipper,
cargo owner)

1
Explanatory Notes
• All references to dollars ($) are to United States of America dollars, unless
otherwise stated;
• Unless otherwise stated, “ton” means metric ton (1,000 kg), “mile” means
nautical mile, “Ha” means hectare;
• Because of rounding, details and percentages presented in tables and
graphics do not necessarily add up to the totals;
• n.a. means not available;
• A hyphen (-) signifies that the amount is nil;

3
1 Introduction

1.1 Background

T
he process of trade policy-making requires identification and evaluation
of alternative options to achieve specific public policy objectives as well
as the impact assessment of the alternative options to the existing poli-
cies. In this context, the Ministry of Trade (MoT) of Republic of Indonesia has
requested the support of the World Bank in devising new and improve existing
international trade related policies for the benefit of Indonesian economy. The
MoT - with the help of the Bank - has identified a number of areas where there
is a need to fill knowledge gaps in order to inform policy-making.
One of the identified areas is promoting “beyond cabotage” under the assump-
tion that changing term of delivery from FOB to CIF will promote the Indonesian-
flag vessels, which in turn the Indonesian economy will be benefited. To that
end the World Bank has mandated PT. ITS Kemitraan to conduct a study on
evaluating the shift in term of delivery from FOB to CIF for Indonesian export
products under the supervision of the World Bank staff. The study aims to eval-
uate the use of FOB vs CIF on four key Indonesian export products, namely
crude palm oil, coal, rubber and shrimp.
The majority of Indonesian export products are shipped under Free on Board
(FOB) term while import products are under Cost, Insurance and Freight (CIF)
term. Currently, it is estimated that 95% of Indonesian foreign trade is shipped
with foreign-flag vessels.
The Government of Indonesia (in this context the MoT) is exploring ways to
increase the use of CIF for exports and FOB for imports in order to increase
the participation of locally established freight forwarders, insurance firms and
shipping companies. This vision is labeled as “beyond cabotage”.
Theoretically, shifting the term of delivery from FOB to CIF will allow the ex-
porters to demand higher prices as they will organize the sea transportation and
carry risk further down the supply chain. Similarly, the usage of FOB term on
imports can generate lower prices as the importer will organize sea transport
and carry risk earlier in the supply chain.
Nevertheless, moving towards a CIF regime for exports and a FOB for imports
not only has the potential to improve the balance of services, but also can have
negative impacts. In buyer driven markets there is little room for the seller to
negotiate the term of delivery. Large brands and retailers often dictate FOB

5
1 Introduction

or even Ex Works (EXW) in order to have full control on delivery and reduce
storage costs (floating stock). If Indonesia has to compete with other countries
over homogeneous products such as textile and footwear, forcing the use of CIF
could potentially damage these manufacturing industries. Therefore, this study
is conducted in order not only to evaluate the shifting term of delivery on four
key export commodities, but also to explore the advantages and disadvantages
of shifting term of delivery.
In addition, changing the term of delivery from FOB to CIF for export prod-
ucts does not necessarily increase the participation of Indonesian-flag vessels
as a main carrier. Meaning that even under CIF term, exporters can still select
foreign-flag vessels as a main carrier. Therefore, the evaluation of advantages
and disadvantages due to shifting the term will be elaborated in this study.

1.2 Objectives
According to the Terms of Reference, the objectives of this study are as follows:
1. To identify the general use of Incoterms in terms of tasks, costs and risks
for seller and buyer, especially for export products in Indonesia;
2. To evaluate the opportunities of shifting the term of delivery on selected
commodities (coal, CPO, shrimp and rubber) from FOB to CIF;
3. To explore the advantages and disadvantages of shifting the term of de-
livery from the macro perspectives;
4. To provide the recommendation to increase export revenues.

1.3 Scope of Works

The scope of works of this study are as follows:
1. General overview of Incoterms and its implementation in Indonesia;
2. Analyzing the selected commodity market, consisting of:

a) The importance of the selected products on the overall export basket

in Indonesia.
b) The global market share of the selected products and the main im-
porting countries.
c) Type of shipment (liner or tramp) commonly used for the selected
products and the availability of Indonesian-flag vessel to potentially
offer the service.
d) Term of delivery commonly used for the selected products.

6
 1.4 Methodology

3. Evaluating the opportunities of shifting the term of delivery for the se-
lected products;
4. Elaborating the advantages and disadvantages of shifting the term of de-
livery from exporters, freight forwarders, insurance firms and shipping
companies point of views;
5. Providing conclusion and recommendation.

1.4 Methodology
In order to meet the objectives of this study, a methodology has been developed
as depicted in Figure 1.1.

START

Production Capacity Value of Products

Production Site
CURRENT CONDITION Cycle of Production Location (Distance)
SURVEY

Port Capacity Port Performance

Commodity Market Shipping Market Port of Export
Cargo Handling Facilities Location (Distance)
Incoterm Type of Shipping
Exporter & Importer User & Service MLO
Flag of Ships
Four Main Export Insurance Provider Forwarder
Products
Ships Specification

National Fleet Commodity Market Shipping Market

Global Market Share
ANALYSIS

Capacity

Existing Policies of
Fleet Availability
Int’l Trade Volume of Export Volume of Export
Commodities Shipment

Existing Terms of Delivery Evaluation of Scenario Analysis for

(ToD) Shifting ToD Changing ToD

Impacts of Shifting
ToD

RECOMMENDATIONS

END

Figure 1.1: Methodology

This methodology can be describe as follows:

1. In order to capture the current conditions in term of commodity and ship-
ping market for the selected export products, some analysis will be con-
ducted in this stage as follows:

7
1 Introduction

a) Commodity Market
i. Reviewing the general use of Incoterms especially for selected
products (crude palm oil, coal, rubber and shrimp).
ii. Identifying the importance of the selected export products, the
global market share of those products, the main importing coun-
tries and the current term of delivery being used.
iii. Determining the volume of export commodities, including crude
palm oil, coal, rubber and shrimp.
b) Shipping Market
i. Identifying the type of shipping, flag of ships and ship specifica-
tion for each ship that serve the international trade for selected
export products.
ii. Analyzing the shipping market to obtain the fleet capacity and
fleet availability to serve the International trade from and to In-
donesia.
iii. Determining the volume of export shipments for dry bulk, liquid
bulk and container.
2. Conducting survey to capture the current capacity, facility and location for
each site and port. Moreover, in order to get some ideas with regard to
the use of current Incoterms for export commodities as well as the existing
policy under the current terms of delivery.
a) Production sites
b) Ports of export for selected export products
c) Users and service providers, such as exporter, importer, forwarder,
main line operator or shipping line, and insurance company.
3. Evaluate shifting the current term of delivery for export products into a
CIF term:
a) Analyze the current condition of the existing terms of delivery for
Indonesian export commodities
i. Analyze the potential impacts by using the current term of deliv-
ery.
ii. Identify the freight under the current term of delivery.
b) Scenario analysis is to analyze the alternative in operating the ship,
which is used to serve Indonesian export commodities after shifting
the term of delivery into a CIF term. There are two scenarios on this
analysis including:

8
 1.4 Methodology

i. Scenario 1: Voyage charter

A. Determine the voyage charter hire.
B. Formulate the Required Freight Rate (RFR) on the one-way
voyage.
C. Identify the freight rate on a CIF term.
D. Compute the difference of freight between using the current
term of delivery and a CIF term for each export product.
ii. Scenario 2: Time charter
A. Determine the time charter hire.
B. Formulate the Required Freight Rate (RFR) on the round trip
scheme.
C. Identify the freight rate on a CIF term.
D. Compute the difference of freight rate by using voyage char-
ter and time charter for each export product.
iii. Determine the potential freight of Indonesian shipping for each
export product.
4. Elaborate the advantages and disadvantages due to shifting the term of
delivery for exporters, freight forwarders, insurance firms and shipping
lines.
5. Provide alternatives of new policy as recommendation based on the anal-
ysis results.

9
2 Basic Concepts

T
his chapter deals with some basic concepts and information required
in order to understand the way how evaluation of shifting the term of
delivery in this study conducted. There are at least 2 (two) basic con-
cepts will be covered briefly in this chapter, namely Incoterms and shipping
business. By introducing these basic concepts, it is hoped that the readers will
have the same perspective so that the readers could follow how the calculation
conducted in this study.
The first concept is dealing with the general overview of Incoterms. Classifica-
tions and rules of Incoterms will be explored in this part as well as division of
costs and risks between the parties involved. In addition, the implementation
of Incoterms in Indonesia will be covered in this part as well.
The second part introduces the theory of shipping, where classification of ship-
ping business will be explored in this part. Since the characteristics of each
commodity transported is different, thus this part presents the type of ships
commonly used for each commodity and covers all costs incurred in each ship
type. In the last part, we present how the shipping market in Indonesia looks
like from the perspective of Indonesian-flag vessels’ availability.

2.1 Incoterms

2.1.1 An Overview of Incoterms

In every transactions of trade between buyers and sellers (or importers and
exporters), they must have a common understanding and perception of the
terms and conditions under which they trade. Therefore, in order to avoid
conflicts and difficulties between parties involved, standard trade definitions
most commonly used in international trade is needed. This standard trade
definitions was developed and administered by the International Chamber of
Commerce (ICC) in Paris.
International Commercial Terms (“Incoterms”) are internationally recognized
standard trade terms used in contracts of sale (not of the contract of carriage).
Incoterms inform the parties what to do with respect to carriage of the goods
from buyer to seller as well as export and import clearance. They also explain
the division of costs and risks between the parties.

11
2 Basic Concepts

Incoterms rules were introduced the first time in 1936 and revised for the first
time in 1957 and thereafter in 1967, 1976, 1980, 1990 and 2000. This appears
to suggest that, in recent times, the Incoterms rules have been revised at 10-year
intervals. It is merely a coincidence that the last three revisions are separated
by 10-year periods. Indeed, the main purpose of the Incoterms rules is to reflect
international commercial practice, which doest not change at a set interval. The
latest version is Incoterms 2010 and entered into force on January 2011.
The number of Incoterms rules has been reduced from 13 to 11 in Incoterms
2010. Other primary note of Incoterms 2010 is that instead of “terms” they
are now referred to as “rules”. Incoterms 2010 classifications are now applica-
ble in two sections: i) for any mode or modes of transport; and ii) for inland
waterway or sea freight. This classification is broken down as shown in Table
2.1. Incoterms are used in contracts in a 3-letter format followed by the place
specified in the contract (e.g. the port or where the goods are to be picked up).

Table 2.1: Classifications or Rules in Incoterms 2010

Rules for Any Mode or Modes of Rules for Sea and Inland Waterway
Transport Transport
EXW Ex Works FAS Free Alongside Ship
FCA Free Carrier FOB Free On Board
CPT Carriage Paid To CFR Cost and Freight
CIP Carriage and Insurance Paid to CIF Cost Insurance and Freight
DAT Delivered at Terminal (new)
DAP Delivered at Place (new)
DDP Delivered Duty Paid

The first class includes the seven rules that can be used irrespective of the mode
of transport selected and irrespective of whether one or more than one mode
of transport is employed. They can be used even when there is no maritime
transport at all. It is important to remember, however, that these rules can be
used in cases where a ship is used for part of the carriage.
In the second class, the point of delivery and the place to which the goods
are carried to the buyer are both ports; hence it is labelled as “sea and inland
waterway” rules. Under the last three rules, all mention of the ship’s rail as the
point of delivery has been omitted in preference for the goods being delivered
when they are “on board” the vessel.
The following sub-section is general information (and very brief) overview of
Incoterms 2010 rules for each class:

12
 2.1 Incoterms

Any Mode or Modes of Transport

1. EXW – Ex Works (named place of delivery)

The seller delivers when it places the goods at the disposal of the buyer
at the seller’s premises or at another named place (i.e.,works, factory,
warehouse, etc.). The seller does not need to load the goods on any
collecting vehicle, nor does it need to clear the goods for export, where
such clearance is applicable.
2. FCA - Free Carrier (named place of delivery)
The seller delivers the goods to the carrier or another person nominated
by the buyer at the seller’s premises or another named place. The par-
ties are well advised to specify as clearly as possible the point within the
named place of delivery, as the risk passes to the buyer at that point.
3. CPT - Carriage Paid To (named place of destination) and CIP – Carriage
And Insurance Paid To (named place of destination)
The seller delivers the goods to the carrier or another person nominated
by the seller at an agreed place (if any such place is agreed between par-
ties) and that the seller must contract for and pay the costs of carriage
necessary to bring the goods to the named place of destination. ‘The
seller also contracts for insurance cover against the buyer’s risk of loss
of or damage to the goods during the carriage. The buyer should note
that under CIP the seller is required to obtain insurance only on minimum
cover. Should the buyer wish to have more insurance protection, it will
need either to agree as much expressly with the seller or to make its own
extra insurance arrangements.”
4. DAT - Delivered At Terminal (named terminal at port or place of destina-
tion)
The seller delivers when the goods, once unloaded from the arriving
means of transport, are placed at the disposal of the buyer at a named
terminal at the named port or place of destination. “Terminal” includes a
place, whether covered or not, such as a quay, warehouse, container yard
or road, rail or air cargo terminal. The seller bears all risks involved in
bringing the goods to and unloading them at the terminal at the named
port or place of destination.
5. DAP - Delivered At Place (named place of destination)
The seller delivers when the goods are placed at the disposal of the buyer
on the arriving means of transport ready for unloading at the named place
of destination. The seller bears all risks involved in bringing the goods to
the named place.
6. DDP - Delivered Duty Paid (named place of destination)
The seller delivers the goods when the goods are placed at the disposal
of the buyer, cleared for import on the arriving means of transport ready

13
2 Basic Concepts

for unloading at the named place of destination. The seller bears all the
costs and risks involved in bringing the goods to the place of destination
and has an obligation to clear the goods not only for export but also for
import, to pay any duty for both export and import and to carry out all
customs formalities.

5 6

SELLER 1 2 3 CARGO CUSTOMS 4 CUSTOMS 7 CARGO 8 BUYER

TERMINAL TERMINAL

EX Works (...named place)

RISKS EXW
COSTS
Free CArrier (...named place)
RISKS FCA
COSTS
Carriage Paid To (...named place of destination)
RISKS CPT
COSTS
Carriage and Insurance Paid to (...named place of destination)
RISKS CIP
COSTS
all modes of transport

Delivered At Terminal (...named place)

RISKS DAT
COSTS
Delivered At Place (...named place)
RISKS DAP
COSTS
Delivered Duty Paid (...named place of destination)
RISKS DDP
COSTS

Risks Costs
The possibility that an event may occur Covers all costs except costs of
which could cause loss of or damage to documents. Sales and purchase contracts
the goods is a “risk”. Buyers and/ or sellers should clearly state which costs on
can protect themselves against risks by transfer of the goods are for account of
transport-insurance buyer and/ or seller

Figure 2.1: Incoterms Rules for All Modes of Transport

Sea and Inland Waterway Transport

1. FAS - Free Alongside Ship (named port of shipment)

The seller delivers when the goods are placed alongside the vessel (e.g.,
on a quay or a barge) nominated by the buyer at the named port of ship-
ment. The risk of loss of or damage to the goods passes when the goods
are alongside the ship, and the buyer bears all costs from that moment
onwards.
2. FOB - Free On Board (named port of shipment)
The seller delivers the goods on board the vessel nominated by the buyer
at the named port of shipment or procures the goods already so delivered.
The risk of loss of or damage to the goods passes when the goods are on
board the vessel, and the buyer bears all costs from that moment onwards.

14
 2.1 Incoterms

3. CFR - Cost And Freight (named port of destination)

The seller delivers the goods on board the vessel or procures the goods
already so delivered. The risk of loss of or damage to the goods passes
when the goods are on board the vessel. The seller must contract for and
pay the costs and freight necessary to bring the goods to the named port
of destination.
4. CIF - Cost, Insurance And Freight (named port of destination)
The seller delivers the goods on board the vessel or procures the goods
already so delivered. The risk of loss of or damage to the goods passes
when the goods are on board the vessel. The seller must contract for
and pay the costs and freight necessary to bring the goods to the named
port of destination. The seller also contracts for insurance cover against
the buyer’s risk of loss of or damage to the goods during the carriage. The
buyer should note that under CIF the seller is required to obtain insurance
only on minimum cover. Should the buyer wish to have more insurance
protection, it will need either to agree as much expressly with the seller
or to make its own extra insurance arrangements.

5 6

SELLER 1 2 3 CARGO CUSTOMS 4 CUSTOMS 7 CARGO 8 BUYER

TERMINAL TERMINAL

Free Alongside Ship (...named port of shipment)

RISKS FAS
COSTS
Free On Board (...named port of shipment)
RISKS FOB
waterway transport

COSTS
sea and inland

Cost and FReight (...named port of destination)

RISKS CFR
COSTS
Cost, Insurance and Freight (...named port of destination)
RISKS CIF
COSTS

Risks Costs
The possibility that an event may occur Covers all costs except costs of
which could cause loss of or damage to documents. Sales and purchase contracts
the goods is a “risk”. Buyers and/ or sellers should clearly state which costs on
can protect themselves against risks by transfer of the goods are for account of
transport-insurance buyer and/ or seller

Figure 2.2: Incoterms Rules for Sea and Inland Waterway Transport

2.1.2 Incoterms in Indonesia

The government policy of PM No. 41/PMK.04/2014 about “The Procedure of

Filling the Export Transaction Value by CIF on the Export Declaration”, the gov-
ernment obligated to use terms of delivery of CIF for Indonesian export prod-

15
2 Basic Concepts

ucts. It means that a CIF term should be added on the export declaration (PEB)
since March, 1st 2014.
This policy was a follow-up from the previous policy, which was published by
Ministry of Trade (MoT) under the policy of PM No.01/M-DAG/PER/1/2014
on January, 2nd 2014, about “The Procedure of Strengthening the Freight and
Insurance for Filling the Export Declaration in Terms of Using Term of Delivery
Cost, Insurance and Freight for Export Activity”.
The objective of this policy is to increase the validity and accuracy of freight
and insurance, which are registered on Indonesian Balance of Payment (NPI).
Moreover, it is also hope that by introducing this policy could encourage the
participation of not only national shipping companies, but also insurance and
freight forwarder industries, simultaneously.
Before implementing this policy, all of export transaction data on the export
declaration were stated as FOB. Even though, in fact, the sellers and buyers
applied different Terms of Delivery (i.e: CFR, CIF or Ex-works). As a conse-
quence, it affected on the differences of recording systems between the Min-
istry of Finance and Bank of Indonesia (BI), whereby BI has currently recorded
Indonesian export transactions by using CIF.
Additionally, in order to minimize the differences, the government obligated
to use a CIF term on the export declaration (PEB) merely for Indonesian ex-
port products. However, this policy could not directly be implemented on the
main Indonesian export products, since it takes time for adapting this policy.
Therefore, MoT suggested to firstly applying this policy only for two key export
products, which are crude palm oil and coal. Only if other Indonesian indus-
tries have a better bargaining position to compete with foreign companies, this
policy would actually be implemented for all Indonesian export products.
CIF, 8%

CFR, 12%

FOB, 80%

Source: Modified from Bank Indonesia (2013)

Figure 2.3: Proportion of Incoterms in Indonesia

Commonly, the implementation of Incoterms in Indonesia could be divided into

three terms of delivery, such as FOB, CFR and CIF. Meanwhile, considering data
from Bank of Indonesia in 2013 (started from January to July) stated that ToD
was dominated by FOB (80%), followed by CFR (12%) and CIF (8%).

16
 2.2 Shipping

2.2 Shipping

Transport (in all modes) is the essential link between supplier and receiver,
and the aim is to receive the goods in good condition, when and where they
are needed with an affordable price. Since most of Indonesian export products
are shipped by sea transportation mode, then understanding the type of ships
commonly used, how they are operate and how the freight rate determined are
indispensable.
This part introduces a basic concept of how the shipping industry be classified,
what types of ship commonly used in shipping market as well as the conse-
quences on costs structure. Afterwards, how to determine the freight rate is
also elaborated in this section.

2.2.1 Shipping Services

Based on the operational characteristics, the shipping business can be catego-

rized into three services: liner shipping, tramp (bulk) shipping and specialized
shipping. Following a brief explanation on each service:

Bulk (Tramp) Shipping

The bulk shipping industry provides transport services for cargo that appear on
the market in shiploads. The principle of this industry is “one ship, one cargo”,
although we cannot be too rigid about this principle. Most of the bulk cargoes
are drawn from the raw material trades such as crude or product oil, iron ore,
coal, grain, etc. and are often described as “bulk commodities”. Bulk cargoes
usually are characterized with low value and high volume.
A shipper with bulk cargo to transport can approach the task in several ways,
depending on the cargo itself and the nature of operation required. The choices
range from total involvement by owning the ships to handing the whole job
over to a specialist bulk shipper. If the shipper has a long-term requirement
for bulk transport but does not wish actively involved as a shipowner, he may
charter tonnage on a long-term basis from shipowner. Shipper with only single
cargo to transport due to short-term contract or seasonal characteristics, then
short-term charter or spot charter would be the best alternative even with the
higher freight.
By the principle of “one ship, one cargo” then the operation (schedule and
routes) of the ships cannot be planned in advance. In other words, ships routes
and schedules are highly depended on the availability of the cargo. The conse-
quence of these characteristics, tariff (freight) cannot be fixed in advance.

17
2 Basic Concepts

Liner Shipping

In term of operation, liner shipping is quiet different compare to the bulk ship-
ping. Volume of cargoes to transport are too small to justify setting up a bulk
operation (one ship, one cargo) therefore, the cargo need to be consolidated
with other cargoes. In shipping terms, this cargo often described as “general
cargo” and usually characterized with high value and low volume. Additionally,
they are often requiring a service for which the shippers prefer a fixed tariff
rather than a fluctuating rate.
From the operational point of view, liner shipping is much more difficult than
bulk shipping since liner operator must be able to:
• Offer a regular service for many small cargo consignments and process
the associated mass of paperwork;
• Charge individual consignments on a fixed tariff basis that yields an over-
all profit — not an easy task when many thousands of consignments must
be processed each week;
• Load the cargo/container into the ship in a way that ensures that it is
accessible for discharge (bearing in mind that the ship will call at many
ports) and that the ship is ‘stable’ and ‘in trim’;
• Run the service to a fixed schedule while allowing for all the normal delays
— arising from adverse weather, breakdowns, strikes, etc.; and
• Plan tonnage availability to service the trades, including the repair and
maintenance of existing vessels, the construction of new vessels and the
chartering-in of additional vessels to meet cyclical requirements, and to
supplement the company’s fleet of owned vessels.
Therefore, skill, expertise and organizational management are essential factors
on the liner shipping operators. The liner shipping business is particularly vul-
nerable to marginal cost pricing by other shipowners operating on the same
routes. Transporting small volume of cargo with many cargo owners faces the
liner operator with a complex administrative task compared to the tramp ship-
ping operators.

Specialized Shipping

“Specialized” shipping sits somewhere between the liner and the bulk shipping
and has characteristics of both. The principal distinguishing feature of these
specialized trades is that they use ships designed to carry a specific cargo type
(this character belong to bulk shipping) and provide a service, which is targeted
at a particular customer (specific routes).
Perhaps the best example of a specialized shipping is car carrier. The cars are
large, high-value and fragile unit, which need careful stowage. Therefore, in

18
 2.2 Shipping

order to increase the efficiency of transport service, ships with specific design is
needed.
The comparison between the characteristics of liner and tramp shipping can
be seen on Table 2.2 as below. Specialized shipping is not included in the
comparison since this study is not fit with this type of service.

Table 2.2: Characteristics between Liner and Tramp Shipping

Characteristics Liner Shipping Tramp Shipping
Cargo value Medium to high Usually low
Shipment size Small cargo lots Very large or ship size lots
Cargo package Container, trailer, pallet, Loose or segregated by
bag, drum dunnage
Service requirements Scheduled, frequent Unscheduled, low
Service pricing Cost driven, berth terms, per Demand driven, variable
tariff (common carriage), terms, voyage/ time/
contract carriage or space bareboat charter party
charter (contract)
Vessel design Highly specialized Very flexible
Entry barriers High Low
Corporation organization Large, extended Small, with agents/ brokers
Carriers/ owners Limited number, Opportunistic
concentrated
Commitment to trade Usually long-term Opportunistic
Investment horizon Usually long-term Short to medium term
Source: Shipping and Freight Resource (2009)

2.2.2 Ship Types

In general, types of ship can be classified into three groups: cargo ships, off-
shore mobile structures, and non-cargo ships. Furthermore, the group cargo
ships can be divided into four sectors, namely general cargo, bulk cargo, oil
and chemicals and liquid gas. The classification of commercial shipping can be
seen in Figure 2.4 [13].
However, the ship types which relevant with this study are only tanker, bulk
carrier and container, therefore, description of the type of ships focuses only on
these type of ships. The detail descriptions can briefly be shown as follows:

19
2 Basic Concepts

2. Offshore Oil
Mobile structures Merchant Shipping 3. Non-cargo
Supply ships

Designs

1. Cargo ships Tugs

Dredgers
GROUP

Fishing boats
Passenger ships
Research ships
SECTOR

1.1 General Cargo 1.2 Dry Bulk 1.3 Oil and Chemicals 1.4 Liquid Gas

Designs Designs Designs Designs

Container-ship Bulk carrier Crude tanker LPG*
Ro-ro* Open hatch* Product tanker LNG*
SHIP TYPE

Barge carrier* Ore carrier Chemical tanker*

MPP Chip carrier Combined carrier
Heavy lift Vehicle carrier*
General cargo Cement carrier
Reefer ships*
rd
* Indicates specialized ship type Source: Maritime Economics 3 Edition, Martin Stopford, 2009

Figure 2.4: The Commercial Shipping Fleet Classification

1. Tanker
Tanker is a ship specially designed to transport liquids in bulk. The main
types of tankers are petroleum tankers (crude and product oil), and chem-
ical tanker. Some type of tanker used to refuel other ships called an oiler.
In general, chemical tankers are used for transporting the following items:
organic and inorganic chemicals, lubricating oils, animal and vegetable
oils and molasses. The ships commonly used to transport of crude palm
oil is chemical tanker.
Chemical tankers usually have a number of separate tanks, which depends
on the material and the coating (e.g. epoxy or zinc paint) on the tanks,
can be used to transport different chemicals. Stainless steel tanks can
be used for carrying acetous liquids whereas epoxy coated tanks can be
used for less aggressive chemicals, e.g. vegetable oils. Parcel tankers that
have separate pumps and pipes for each tank are able to handle different
chemicals without any mixing. These types of chemical tanker are often
used to carry molasses and vegetable oils. For some chemical (e.g. palm
oil) it is necessary to maintain a defined temperature so that viscosity
remains at a certain level. In this case, a boiler transfers heat to the tanks
through heating coils [4].
In terms of ships size, Shell Oil developed the average freight rate assess-
ment (AFRA) system, which classifies tankers of different sizes, as follows:

20
 2.2 Shipping

DWT Group Name

10,000 - 24,999 Small tanker
25,000 - 34,999 Intermediate tanker
35,000 - 44,999 Medium Range 1 (MR1)
45,000 - 54,999 Medium Range 2 (MR2)
55,000 - 79,999 Large Range 1 (LR1)
80,000 - 159,999 Large Range 2 (LR2)
160,000 - 319,999 Very Large Crude Carrier (VLCC)
320,000 - 549,999 Ultra Large Crude Carrier (ULCC)
2. Dry Bulk Carriers
A dry bulk carrier is a ship specially designed to transport dry unpackaged
bulk cargo, such as grains, coal, ore, etc in its cargo holds. International
Maritime Organization (IMO) defines a bulk carrier as a ship constructed
by a single deck, top side tanks and hopper side tanks in cargo spaces
and intended to primarily carry dry cargo in bulk; an ore carrier, or a
combination carrier.
Dry bulk carriers usually have several holds that are covered by hatches
and equipment for loading and unloading of the cargo. In large part the
design of dry bulk carriers depends on the density (stowage factor) of
the cargo that will be transported. The densities of common cargoes vary
from 0.6 tons per cubic meter for light grains to 3 tons per cubic meter for
iron ore. For high density cargo the limiting factor for the ship design is
the overall weight of the cargo, while for light cargo it is volume.
In terms of size, dry bulk carriers can be classified as follows [4]:
DWT Group Name
10,000 - 35,000 Handysize
35,000 - 59,000 Handymax
60,000 - 80,000 Panamax
80,000 and over Capesize
3. Container Ships
Container ships are cargo ships that carry all of their load in truck-size
intermodal containers. They are a common means of commercial inter-
modal freight transport and now carry most of seagoing non-bulk cargo.
Container ship capacity is measured in twenty-foot equivalent units (TEU).
Typical loads are a mix of 20-foot and 40-foot (2-TEU) ISO-Standard con-
tainers, with the letter predominant.
Container ships eliminate the individual hatches, holds and dividers of the
traditional general cargo ships. The hull of a typical container ship is a
huge warehouse divided into cells by vertical guide rails. These cells are
designed to hold a cargo in pre-packed units - called containers.
Containerization has lowered shipping expenses and decreased shipping
time (easy in cargo handling), and this in turn helped the growth of inter-

21
2 Basic Concepts

national trade. Prior to containerization, huge gangs of men would spend

hours fitting various items of cargo into different cargo holds. Today, with
containerization, cranes installed either on the pier or on the ship, are
used to place containers on board.
Container ships are distinguished into 7 major size categories, as follows:
TEU Group Name
up to 1,000 Small feeder
1,001 - 2,000 Feeder
2,001 - 3,000 Feedermax
3,001 - 5,100 Panamax
5,101 - 10,000 Post-Panamax
10,001 - 14,500 New Panamax
14,501 and higher Ultra Large Container Vessel

2.2.3 Freight Market

Freight market is a market in which sea transport services is bought and sold.
Basically, freight market occurs when the shipowner comes to the market with
a ship available (free of cargo) and the shipper comes to the market with a
volume of cargo to transport.
The freight market has two different types of transaction, the freight contract in
which the shipper (cargo owner) buys transport service from the shipowner at a
fixed price per ton of cargo, and the time charter under which the ship is hired
by a certain period. The freight contract also known as voyage charter suits
shippers who prefer to pay an agreed sum of money and leave the management
of the transport to the shipowner. On the other hand, the time charter is suitable
for cargo owners who experienced in ship operator and prefer to manage the
transport themselves.
Regardless of the type of transaction in freight market, the component of ship-
ping costs are the same, the difference in these two types of transaction lies on
“who pays what”. In other words, the difference lies in the division of responsi-
bility for costs incurred.
In general, the shipping costs can be classified into two main categories. First
is the cost of operating the ship, and the second is costs of maintaining and
financing the ship. These classifications can be broken down as follows:
1. Cost of operating the ship
This cost basically constitute the expenses in order to operate the ship.
Furthermore, this costs consists of:
a) Operating Costs, which constitute the expenses involved in the day-
to-day running of the ship - essentially those costs such as crew,
stores, running repair, insurance and administration.

22
 2.2 Shipping

b) Voyage Costs are variable costs associated with a specific voyage and
include such as items as fuel cost, port charges and canal dues.
c) Cargo Handling Costs represent the expense of loading, stowing and
discharging cargo.
2. Cost of maintaining and financing the ship, which consisting of:
a) Capital Costs, are the costs to finance the ship and depend on the way
the ship has been financed. They may take the form of dividends to
equity, which are discretionary, or interest and capital payments on
debt finance, which are not.
b) Periodic Maintenance Costs are incurred when the ship is dry-docked
for major repairs, usually at the time of its special survey. In older
ships this may involve considerable expenditure, and it is not gener-
ally treated as a part of operating expenses.
The classification of shipping costs can be seen in Figure 2.5.

Annual costs of operating fleet

Operating Costs Voyage Costs Cargo handling
Depend on: Depend on: Depend on:
Ÿ Crew number Ÿ Fuel consumption Ÿ Cargo type
Ÿ Crew wages Ÿ Main engine Ÿ Ship design
Ÿ Stores Ÿ Auxiliary engines Ÿ Cargo handling
Ÿ Luricants Ÿ Fuel price gear
Ÿ Repairs Ÿ Speed Ÿ Unitization of
SHIP REVENUE Ÿ Maintenance Ÿ Port charges cargo
Ÿ Insurance Ÿ Canal dues Ÿ Organization
Depend on:
Ÿ Administration Ÿ Tugs etc. Ÿ Stevedore costs
1. CARGO CAPACITY
- Ship size
- Bunkers and stores Taxes
2. PRODUCTIVITY
- Operational planning
- Backhauls Free
- Operating speed cashflow
- Off hire time
- Dwt utilization
- Port time Dividends
3. FREIGHT RATES
- Market balance Capital Interset Maintenance
- Quality of service Depend on: Depend on: Depend on:
- Competition Ÿ Size of loan Ÿ Source of loan Ÿ Age of ship
Ÿ Length of loan Ÿ Size of loan Ÿ Maintenance
Ÿ Moratorium Ÿ Interest rate policy
Ÿ Bullet Ÿ Term of loan Ÿ Special survey
Ÿ Currency cycle
Ÿ Regulation

Annual costs of maintaining and financing fleet

rd
Source: Maritime Economics 3 Edition, Martin Stopford, 2009

Figure 2.5: The Components of Shipping Costs

23
2 Basic Concepts

2.2.4 Required Freight Rate

The keys to survival in the shipping market in which shipowners have to work
with are the revenue received from operating the ship and cost of running and
maintaining the ship. The components of shipping costs are already explained
in the pervious sub-section. This section deals with the revenue side of operat-
ing the ship.
Revenue received from operating the ship is a multiplication of the freight
(price) by volume of cargo transported. Although shipowners do not gener-
ally control the freight they receive per ton of cargo, there is a way to estimate
whether the ship can generate positive cash flow or not. This can be done by
calculating the Required Freight Rate (RFR).
Required Freight Rate (RFR) is the tariff that is able to cover all expenses in-
curred in the process of sea transport with no profit. In other words, RFR is
basic price per ton cargo transported. Meanwhile, freight is the rate (selling
price) charged by the shipowner to the shipper that is including shipowner’s
profit. Thus, the relationship between RFR with freight can be written in the
following formula:
F reight = RF R + P rof it (2.1)

Therefore, in order to determine the freight to be charged, it is necessary to

firstly calculate RFR which depends on the type of transaction used in freight
market, either freight contract or time charter. As mentioned in the pervious
sub-section, the difference between these two types of transaction in freight
market lies in “who pays what”. The distribution of responsibility of cost in-
curred in ship operation based on the type of transaction can be seen in the
Figure 2.6.

Capital Operating Maintenance Voyage Cargo Handling

Cost Cost Cost Cost Cost

Freight Contract SHIPOWNER CHARTERER

(Voyage Charter) SHIPOWNER

Time Charter OWNER CHARTERER

Figure 2.6: Costs Distribution on Freight Market Transaction

From charterer (cargo owner) point of view, the main objective to choose the
selection of type of transaction is in order to make sea transport costs as mini-
mum as possible. Therefore, the selection of the type of transaction should not
only consider freight charged by shipowner, but also cost which is incurred and
not covered in the transaction.
For example, in freight contract, there are two alternatives in which alternative
1 except cargo handling cost, all costs paid by shipowner, while in alternative

24
 2.2 Shipping

2 all costs paid by shipowner. In terms of freight charged by shipowner, alter-

native 1 is lower than alternative 2, but in alternative 1 cargo owner still have
to pay cargo-handling cost. Therefore, in order to select the best alternative,
cargo owner should calculate the unit cost, in which in alternative 1 unit cost
is freight (charged by shipowner) plus cargo handling cost divided by total vol-
ume of cargo. Meanwhile, for alternative 2, the unit costs is freight divided by
total volume of cargo.

2.2.5 Shipping Market in Indonesia

The implementation of cabotage principle in Indonesia has been delivering a

big impact to the national shipping industry. According to Indonesian National
Shipowners’ Association (INSA), the number of Indonesian-flag vessels oper-
ated in domestic waters has dramatically increased by 320% from 6,041 units
in 2005 to 25,352 units in 2016 (see in Figure 2.7).

Figure 2.7: Increasing the Number of Indonesian-Flag Vessels

The number of Indonesian-flag vessels has grown up to 25,000 units, which

proved that the cabotage principle has benefited on the national shipping in-
dustry. Based on the number of unit, we depict the composition of Indonesian-
flag vessels that consist of general cargo, tug boat, barge, tanker, container ship,
bulk carrier, etc.
The result shows that only three type of vessels dominate the shipping market
in Indonesia, which are barge (8,128 units), tug boat (7,819 units) and general
cargo (3,525 units). It presents that Indonesia has less number of Indonesian-
flag vessels especially for container ship, tanker and bulk carrier. The detail of
Indonesian-flag vessel composition by unit can be seen on Figure 2.8 as below:

25
2 Basic Concepts

Figure 2.8: The Composition of Indonesian-Flag Vessels by Unit

On the other hand, in term of ship capacity, barge has also dominated by
48.50% of total ship deadweight (44.96 million DWT) in 2016. Following that
are tanker by 13.65% (6.13 million DWT), general cargo by 13.47% (6.06 mil-
lion DWT) and bulk carrier 11.04% (4.96 million DWT). It can be concluded
that shipping market in Indonesia has been dominated by barge, in term of unit
and capacity. It proves that the availability of Indonesian-flag vessels particu-
larly for cargo shipments is less to transport huge number of Indonesian export
products.

26
3 Crude Palm Oil

T
his chapter deals with the evaluation of shifting ToD from FOB to CIF
for crude palm oil (CPO) in particular. This chapter briefly explains an
overview of palm industry in Indonesia, followed by the current market
condition of CPO. Analysis of the current market condition will be conducted
not only from supply side, but also from demand side. Analyzing from supply
side will include the nature of the production, production capacity and the
importance of CPO in term of export on the overall Indonesian export basket.
Meanwhile, from the demand side, the global market share of Indonesian CPO
will be elaborated as well as the main importing countries.
In the second part, we present the shipping market condition of CPO both in
Indonesia and worldwide. Since there is a strong relationship between charac-
teristics of commodity with ship design, then understanding on what types of
ship commonly used is necessary in order to evaluate the shifting ToD easily.
This section describes types and sizes of ships used to transport CPO, which will
be used as a benchmark in the further calculation process.
In the third section, we evaluate the shift in ToD of CPO from FOB to CIF, which
is the main substance of this chapter. The evaluation is conducted by comparing
the existing ToD of CPO in FOB term with the calculated CIF term.
This chapter ends with concluding remarks containing a summary of the previ-
ous sections.

3.1 Commodity Market

3.1.1 Palm Oil Industry in Indonesia

Palm oil supply chain in Indonesia is divided into three industries: upstream,
midstream, and downstream. Upstream industry covers all activities from plan-
tation to cropped palm oil products, including Crude Palm Oil (CPO). Trading
and transporting palm oil products are belong to midstream industry, while
refining until producing the final product are parts of downstream industry.
The development of palm oil plantations in Indonesia has been started in 1960
and expanded rapidly in the following years. The growth rate of palm oil plan-
tations has continued to rise by an average of 7.6% in the last 10 years [11].

27
3 Crude Palm Oil

UPSTREAM MIDSTREAM DOWNSTREAM

Plantation Trade Refining

RBD Palm Oil

Fresh Fruit Bunches (FFB)

Fractionation

Palm Oil Mill

RBD Olein RBD Stearin

Crude Palm Oil (CPO)

Transportation
Or Palm Kernel Oil (PKO) Final Product

Figure 3.1: CPO Supply Chain in Indonesia

In terms of ownership, the palm oil plantations in Indonesia can be grouped

into three categories, namely private-owned, stated-owned, and public farmers
(smallholder). The distribution of the ownership of palm oil plantation can be
seen in Figure 3.2.

Private Public
4.5 Mill-Ha 4.9 Mill-Ha
45% 48%

State-Owned
0.7 Mill-Ha
7%
Source: Modified from Directorate General of Plantation (2014)

Figure 3.2: Palm Oil Plantation in Indonesia, by ownership

The average growth of palm oil area in 2010 - 2014 was about 6.9% per year.
The smallholder plantation have the highest growth with average 7.7% whereas
private owned and state-owned have the average growth 6.7% and 4.4% re-
spectively. According to the Directorate General of Plantation, the total area of
palm oil plantation in 2014 was 10.1 million hectares.

28
 3.1 Commodity Market

12

10

Area (Million-Ha)
8

-
2010 2011 2012 2013 2014
Private 4,366,617 4,561,966 4,751,868 5,381,166 5,656,105
State-owned 631,520 678,378 683,227 727,767 748,272
Public 3,387,257 3,752,480 4,137,620 4,356,087 4,551,854

Source: Modified from Directorate General of Plantation (2014)

Figure 3.3: Growth of Palm Oil Plantation Area in Indonesia

3.1.2 Production of Palm Oil

Palm oil plantations in Indonesia are scattered in 22 provinces with the highest
concentration in Sumatra with total area of 6.9 million hectares and thereafter
in Borneo with total area of 3.4 million hectares and partly in Sulawesi, West
Java, Banten, Maluku and Papua. In line with increasing in total area, the
production also increased significantly.
Palm oil production in Indonesia can be classified into two categories, crude
palm oil (CPO) and palm oil products. The growth of both palm oil production
(CPO and palm oil products) in Indonesia from 2010 - 2015 can be seen in
Figure 3.4. This figure shows that in 2010-2015 the total production of palm
oil has been growth 7.1% per year.

35
Produc!on
30
Volume (Million-Ton)

25
Export
20

15

10
Domes!c
5

-
2010 2011 2012 2013 2014 2015
Produc!on 21,958,120 23,096,541 26,015,518 27,782,004 29,344,479 30,948,931
Export 16,291,856 16,436,202 18,845,020 20,577,976 22,892,387 26,467,564
Domes!c 5,666,264 6,660,339 7,170,498 7,204,028 6,452,092 4,481,367

Source: Modified from Directorate General of Plantation (2015)

Figure 3.4: The Growth of Palm Oil Production and Consumption

From the total export of both CPO and palm oil products, 42.85% of them in
average exported as CPO. In addition, the export of CPO has been declined in
this period with the growth of -4.7% average per year, while export of palm oil

29
3 Crude Palm Oil

products growth with significant value of 32.4%. The growth of CPO and palm
oil products in terms of volume can be seen in Figure 3.5.

30

Export
25

20
Volume (Million-Ton)
15
Palm Oil Products
10

5 CPO

-
2010 2011 2012 2013 2014 2015
Export 16,291,856 16,436,202 18,845,020 20,577,976 22,892,387 26,467,564
CPO 11,158,124 10,428,085 7,299,369 6,584,732 5,726,820 7,788,550
Palm Oil Products 5,133,732 6,008,117 11,545,651 13,993,244 17,165,567 18,679,014

Source: Modified from Directorate General of Plantation (2015)

Figure 3.5: Comparison between Palm Oil Export and CPO Export

3.1.3 Indonesian CPO Export

Indonesian export products can be classified into two main sectors, oil & gas and
non-oil & gas. With the total value of export more than $161 billion in 2015, the
contribution of oil & gas was 15% and non-oil & gas was 85%. Palm oil product
belongs to the non-oil & gas sector with total value of export in 2015 was $20.7
billion which represented 12.87% of the total Indonesian export basket. The
importance of palm oil on the overall Indonesian export basket can be seen in
Figure 3.6.
0.02% Others

17.96% Mining 19.45% Palm Oil

Machinery &
13.55% Automotive

11.50% Textile

Non-Oil & Gas $ 137 Billion 6.48% Electronics

(84.95%) 77.90% Industry
5.79% Rubber

Oil & Gas $ 24.2 Billion

19.45% Others
4.11% Agriculture

Source: Modified from Directorate General of Industry (2015)

Figure 3.6: Indonesian Export Commodities by Sectors (billion $)

30
 3.1 Commodity Market

Furthermore, palm oil products was the leading Indonesian export product,
which gained the highest value during 2012 - 2015, even though the trend
slightly decrease by 3% in average. The growth of export value of top five
Indonesian export products can be seen in Figure 3.7.

25.00 23.40 23.71

20.66 20.75

20.00

15.81
Export Value (Billion $)

15.03 14.68 14.46

15.00
12.45 12.66 12.72 12.26

9.44
10.00 8.52
8.07
10.82 6.91
9.72
7.50
5.00 6.17

0.00
2012 2013 2014 2015

Palm Oil Mach. & Automo!ve Tex!le Electronics Rubber

Source: Modified from Directorate General of Industry (2015)

Figure 3.7: Top Five Indonesian Export Products

On the other hand, the contribution of palm oil products on the total export bas-
ket of Indonesia has slightly different in terms of volume. Based on the Central
Bureau of Statistics, total Indonesian export volume in 2015 was 509.6 million
ton. Meanwhile, total export of both CPO and palm oil products was 26.47 mil-
lion ton (see Figure 3.5), meaning that the contribution of bot CPO and palm
oil products on the total Indonesia export basket was 5.2% with distribution
where CPO contribute 1.5% and palm oil products was 3.7%.

3.1.4 Global Market Share

As mentioned in the previous sub-section, the total volume of both CPO and
palm oil products in 2015 was 26.47 million tons. According to International
Trade Center (ITC), this value represented 56% of world’s total demand and
recorded as the largest exporter. Meanwhile, Malaysia was on the second posi-
tion by amounting to 15.43 million tons or 33% of world’s demand. Followed
by the Netherlands, Papua New Guinea, and Guatemala.
In addition, Indonesia also ranked on the top supplier in terms of export value
(FOB prices), where Indonesia dominated by US$ 15.39 billion, which repre-
sented 53% of the total world’s demand by 29.1 billion US$ in 2015. Mean-
while, Malaysia was on the second by 9.5 billion US$ (33%).
The global market share for both CPO and palm oil products in 2015 in terms
of value (FOB prices) and volume can be seen in Figure 3.8.

31
3 Crude Palm Oil

FOB Value (Billion USD) Volume (Million Tons)

Others
Others 2.93
2.30 6%
8% Indonesia Guatemala Indonesia
Germany 0.47
0.37 15.39 1% 26.47
1% 53% 56%
Papua New Guinea
Papua New Guinea 0.62
Malaysia 1% Malaysia,
0.44
1% 9.50 15.43 ,
33% Netherlands 33%
Netherlands 1.37
1.09 3%
4%

Source: Modified from International Trade Center (2015)

Figure 3.8: Global Market Share of Palm Oil Products in 2015

The Netherlands becomes the world’s 3rd largest exporter of palm oil products,
even it is not a producer country, because its palm oil export is re-export. In
addition, from 2012 to 2014 Indonesia’s market share has been increasing from
46% to 50%, so it has proven that Indonesia has a strong position as major
supplier of palm oil.
Since the scope of works of this study is CPO, from this section onward, we
will focus on the global market share for CPO only as one of the potential palm
oil products. In line with the global market share of palm oil products, there
are top three world’s exporter countries of CPO, such as Indonesia, Malaysia
and Papua New Guinea [9]. Following that, Guatemala and Colombia are the
potential exporter countries. The total world’s CPO volume diminished by 21%
in 2014 but it fortunately grew up by 18% in 2015. Afterwards, the total CPO
volume of top five exporter countries from 2013 to 2015 is presented as below:

Table 3.1: Top Five Exporting Countries

2013 2014 2015
Exporter
Vol (ton) % Vol (ton) % Vol (ton) %
Indonesia 6,584,732 41.0% 5,726,820 45.2% 7,788,550 52.0%
Malaysia 3,963,186 24.7% 4,619,337 36.4% 5,445,708 36.3%
Papua New Guinea 516,364 3.2% 505,290 4.0% 545,168 3.6%
Guatemala 332,818 2.1% 372,177 2.9% 431,373 2.9%
Colombia 140,921 0.9% 199,265 1.6% 351,396 2.3%
Others 4,511,644 28.1% 1,259,799 9.9% 420,018 2.8%
TOTAL 16,049,665 100.0% 12,682,688 100.0% 14,982,213 100.0%
Source: Modified from Central Bureau of Statistics of Indonesia (2015)

Papua New Guinea, Guatemala and Colombia are CPO producer countries that
should allocate more production in order to meet both export and domestic
needs. On the other hand, Indonesia is known as the most efficient country in
producing palm oil so that Indonesian CPO could be more competitive in the
international market.

32
 3.1 Commodity Market

3.1.5 Port of Export

According to Central Bureau of Statistics (2016), Indonesia’s largest palm oil

processing are located in Sumatra and Kalimantan. Therefore, top five ports
that serve CPO export are also located in these islands. In 2015, the total num-
ber of shipments from these top five ports was 135 out of 245 total shipments,
which represented 55.1%. These top five ports of export can be seen in Table
3.2.

Table 3.2: Ports of Export for Indonesian CPO by Shipment

Name of Port Province Shipments %
Dumai Riau 51 20.8%
Belawan North Sumatra 25 10.2%
Teluk Bayur West Sumatra 24 9.8%
Tarahan Lampung 18 7.3%
Tarjun South Kalimantan 17 6.9%
Others - 110 44.9%
TOTAL 245 100.0%
Source: Central Bureau of Statistics of Indonesia (2016)

In 2015, Riau was the largest exporter of CPO through port of Dumai, which
reached 20.82% or 51 shipments out of 245 shipments. North Sumatra ranked
the second position through Port of Belawan, which achieved 10.2% or 25 ship-
ments. More detail about the proportion of main port for CPO export can be
seen in Figure 3.9.

Figure 3.9: The Proportion of Main Ports of Export

33
3 Crude Palm Oil

3.1.6 Main Importing Countries

Based on the Central Bureau of Statistics (2016), in terms of export volume in

2015, the main importing countries for Indonesian CPO are India, the Nether-
lands, Malaysia, Singapore and Spain (see in Table 3.9).

Table 3.3: Importing Countries of Indonesian CPO by Volume

Importing Country Volume (thousand tons) %
India 3,820 49.1%
Netherlands 1,044 13.4%
Malaysia 622 8.0%
Singapore 605 7.8%
Spain 581 7.5%
Others 1,116 14.3%
TOTAL 7,788 100.0%
Source: Central Bureau of Statistics of Indonesia (2016)

In terms of volume, Malaysia is the world’s 2nd largest producer of palm oil and
the 3rd biggest importer of CPO at the same time. This is because majority of In-
donesian palm oil companies are subsidiaries of companies in Malaysia. Mean-
ing that Malaysia plays the same role as the Netherlands, which is re-exporter of
Indonesian CPO, even though it basically has a large palm oil plantation. Hence,
it affects on the Malaysia’s status on the International CPO trading, because it
can be either as exporter or importer simultaneously.

3.1.7 Existing Terms of Delivery

The following scheme presents the implementation of Incoterms in Indonesia

for CPO product in particular by some of the largest palm oil companies in
Indonesia.

Figure 3.10: The Implementation of Incoterms for Indonesian CPO Export

34
 3.2 Shipping Market

Figure 3.10 depicts the trading agreement (sales contract) between the seller
and buyer going abroad as the center of the company. The explanations regard-
ing two conditions above are as follows:
• Condition 1
When Indonesia plays a role as a seller and directly delivers the export
products to importing country as an end user. Under this condition, In-
donesia could manage all kinds of purpose, including the cargo (CPO),
trading (documentation) and transport (vessel). However, Indonesian
CPO exports are currently operated by foreign vessels under a FOB regime.
• Condition 2
Under this condition, Indonesia merely plays a role as a provider of CPO,
but the trading and transport are managed by other country, in this case
Malaysia or Singapore. It means that Singapore or Malaysia acts as re-
exporter of Indonesian CPO, so that trading CPO from Indonesia to Sin-
gapore/ Malaysia uses FOB term and foreign vessels. Conversely, Indone-
sian CPO from Singapore/ Malaysia would be re-exported by applying CIF
term and might be transported by Malaysian or Singaporean-flag vessels.
Both conditions can be applied on the CPO trading. However, it depends on
who will be the importing countries. If they are Singapore, Malaysia and the
Netherlands, it means that they will act as re-exporter instead of end buyer.

3.2 Shipping Market

There is a strong correlation between characteristics of commodities (including
packaging) transported and the ship design. In other words, the type of ship
depends on the type of cargo carried. Even though basically all type of ships can
transport any kinds of commodities, but in order to achieve transport efficiency,
the specific type of ships is required.
For example, general cargo ships or container ships can transport CPO by re-
placing it into drums. These alternatives can be done if the volume for one
shipment in a small volume. However, if the volume for one shipment is huge
(in bulk), then using specialized ship is more efficient. Since all of CPO export
always shipped in (liquid) bulk and transported using chemical tanker, then
evaluation of shipping market in this section will focus on the bulk shipping
industry.

3.2.1 Ship Type

As already stated in Section 2.2, the type of ships commonly used to transport
CPO belongs to the sub-group of chemical tanker under the group of tanker.
Furthermore, there are several division of chemical tanker based on the cargo
carried, namely organic, inorganic vegetables/ animal oil and fats.

35
3 Crude Palm Oil

On the basis of products, organic chemical is the largest commodity transported

with chemical tanker with the rapid demand in the industry. On the other hand,
vegetables/ animal oil and fats has its own market share due to increased health
problems, including a positive impact on demand for palm oil and soybean oil.
An inorganic chemical is expected to remain stable in the market. Demand and
forecast of chemical products up to 2020 can be seen in Figure 3.11.

Source: Grand View Research, Chemical Tanker Analysis

Figure 3.11: Demand and Forecast of Chemical Products

In terms of number of ships used, global chemical tanker market reached 192,4
million tons in 2012. Rising demand from emerging economies and rising GDP
has brought the development of the global chemical industry. The chemical
tanker market has experienced growth around 20.5% between 2008 - 2012.
However, the operation of chemical tanker is high risk, therefore, restrictions
and regulations to protect environment have been rising. The global chemical
tanker trend can be seen in Figure 3.12 below:

Source: www.spimarinesia.com (2012)

Figure 3.12: Trend of Global Chemical Tanker

The market structure of global chemical shipping is oligopoly. This is indicated

by the fact that 11 shipping companies (operators) control more than 52% of

36
 3.2 Shipping Market

the chemical tanker market worldwide. These companies that are extremely
dominating the chemical tanker market are illustrated in Figure (3.13).

Source: www.spimarinesia.com (2012)

Figure 3.13: Global Operators of Chemical Tanker

As we can see from this figure, one of the global operators is Indonesian com-
pany, that is PT. Berlian Laju Tanker (BLT). However, BLT is now unable to
compete in chemical transportation market anymore.

3.2.2 Indonesian Fleet Availability

One of the objectives of this study is to evaluate the availability of Indonesian

fleet to potentially offer the service to replace foreign-flag ships. Therefore, we
presented the availability of Indonesian fleet for chemical tanker.
According to the Ministry of Transportation, there are 550 Indonesian-flag tankers
in 2011. Yet, 303 units or 55.1% of total tankers are not identified by size. We
used AFRA scale to classifies tanker based on the deadweight of ship (DWT).
Based on the AFRA scale, the population of total tanker in Indonesia is shown
in Table (3.4):
From Table (3.4) we can see that majority of Indonesian-flag tankers are rela-
tively small in size (mostly are Handysize). The population of this size is 205
ships or 37.3% of total tanker population. In addition, out of 505 units mostly
are oil tankers (product oil), which are not suitable to transport CPO.
According to the Ministry of Transportation, the number of Indonesian-flag
chemical tankers (which is suitable for CPO) is only 22 units (4%) as can be
seen in Figure (3.14). Furthermore, from the total Indonesian-flag chemical
tankers are mostly used for domestic transport. This condition indicates that for
export purposes, Indonesia is still lack of chemical tanker especially for trans-
porting CPO.

37
3 Crude Palm Oil

Table 3.4: Number of Indonesian-Flag Tanker by Size

AFRA Scale Size in DWT Unit %
Handysize up to 10,000 205 37.3%
General Purpose Tanker 10,000 - 24,999 16 2.9%
Medium Range Tanker 25,000 - 44,999 16 2.9%
Large Range 1 45,000 - 79,999 2 0.4%
Large Range 2 80,000 - 159,999 6 1.1%
VLCC 160,000 - 319,999 2 0.4%
ULCC 320,000 and over 0 0.0%
Unknown Unknown 303 55.1%
Source: Directorate of Seaborne Traffic (2011)

Figure 3.14: Proportion of Tanker Ships in Indonesia

3.2.3 Shipments of Indonesian CPO

According to Ministry of Transportation, in 2011 there were 1,478 shipments of

CPO export, where 672 shipments (45%) were transported by General Purpose
Tanker, followed by Handysize Tanker with 406 shipments. The proportion of
Indonesian CPO shipment by size of ships can be seen in Figure (3.15).
In terms of flag states, there are five biggest flag states of tankers used for
Indonesian CPO export. This big five of flag states of tankers are Panama,
Singapore, Marshal Island, Hongkong and Malaysia. The proportion of flag
states of chemical tanker for Indonesia CPO export can be seen in Figure (3.16).
From the big five flag states, there are two countries that implement Flag Of
Convenience (FOC), which is closely related to open registry term. These two
countries are Panama and Marshal Island with the total proportion of 29% of
total ships used. FOC is a condition where a ship is registered in a country other
than of the ship’s owner.

38
 3.3 Evaluation of Shifting ToD

Figure 3.15: Shipment of Indonesian CPO by Size of Ships

Figure 3.16: The Big Five Flag States for Indonesian CPO Export

Owners of a ship may register the ship under a FOC to reduce operating costs
or avoid the regulations of the owner’s country. In other words, owner with the
FOC ships can offer the lower price compare to non-FOC ships.

3.3 Evaluation of Shifting ToD

3.3.1 Basic Calculation

The Terms of Delivery (ToD) used in every transaction of trade is totally depend-
ing on the bargaining position of buyers or sellers. Those who have a higher
bargaining position will tend to determine the terms used in order to control
the whole process of transactions. The decision to choose particular terms used
highly relies on several variables ranging from price, quality and trust.
As already stated in Section 3.1, CPO is always shipped in (liquid) bulk, there-
fore, evaluation of shifting ToD is conducted by applying common characteris-

39
3 Crude Palm Oil

tics of bulk shipping.

Based on the standard rules in Incoterms (see Section 2.1) the division of re-
sponsibility between sellers and buyers in FOB term and CIF term can be seen
in Figure 3.17. From this figure, we can see that there is no difference in the
way to calculate the freight.
Remain Constant Remain Constant
Focus Study

Custom Transport to Unloading in Loading Sea Freight Unloading Insurance Loading to Transport to Custom
Declaration Origin Port Origin Port Cost (from O - D) Cost Cost Truck Destination Declaration

FOB
Seller Risks Buyer Risks

CIF
Seller Risks Buyer Risks

Figure 3.17: Seller and Buyer Responsibilities in FOB and CIF

The Figure 3.17 also shows that costs in which this study will focus on are sea
freight, unloading cost and insurance cost. The unloading cost is to remain
constant whether in FOB or CIF, since it depends on the port tariff, which are
not directly related to the terms used. Meanwhile, the insurance cost is market
driven and will not calculate in detail. The only cost that will be calculated and
to be compared is sea freight.
We used one route taken from one of the biggest CPO exporter in Indonesia in
this basic calculation. The route selected as a case study is from Port of Selabak,
Kalibaru, South Kalimantan to Port Klang, Malaysia with the total distance of
1,315 nautical miles as seen in Figure 3.18 below.

Figure 3.18: Selected Route of CPO for a Case Study

40
 3.3 Evaluation of Shifting ToD

Based on the information gathered from the interview with the one of the
biggest exporter in Indonesia1 , CPO from South Kalimantan to Port Klang is
mostly shipped by chemical tanker with the size of about 3,000 DWT and pay-
load capacity of 2,700 tons. The freight in the past year has been fluctuated
ranging from $26 - $30 per ton where the current freight is $26 per ton. It
should be noted that this freight is consisting of sea freight and unloading cost
for the transaction of voyage charter for one voyage.

Further details of the data for CPO export from the company we interviewed
that will be used as the basis for the further calculation, can be summarized as
follows:

1. Port of Origin

Port of Selabak is a private owned port which is dedicated port for CPO lo-
cated in Sungai Durian, South Kalimantan. The main facilities and equip-
ments of port of Selabak can be seen in Table 3.5 below:

Table 3.5: Port of Selabak Main Facilities

Port Facilities Specifications Unit
Harbor type Jetty - River natural
Depth 6.0 - 8.1 mLWS
Max DWT 8.000 tons
Dolphin berths 1 unit
Type of loading/unloading piping
- Productivity 100 tons/hour/pipe
- No of pipe 2 unit
Storage Tank
- No of Tank 3 unit
- Capacity 2,000 tons/tank

2. Port of Destination

Port of destination in this case study is Port Klang, Malaysia. As the largest
port in Malaysia, Port Klang is located in several locations, North, South
and West Port. The terminal dedicated for CPO is located in West Port
with the following main facilities and equipments:

1
As per company requested, the company name is not mentioned in this report

41
3 Crude Palm Oil

Table 3.6: Port Klang Main Facilities

Port Facilities Specifications Unit
Harbor type Liquid Bulk with pipelines
Depth 10.0 - 16.1 mLWS
Max DWT 40.000 tons
Dolphin berths 5 unit
Berths length 1,361 m
Type of loading/unloading piping
- Productivity 100 tons/hour/pipe
- Unit pipe 2 unit

3. Ship specification
As already mentioned, the ship used in this case study is based on the
information we had during the interview with the company. This ship is
a chemical tanker with the type of freight transaction is freight contract
(voyage charter) for one voyage. The specifications of this ship is shown
in Table 3.7 below

Table 3.7: Ship Specification in the Case Study

General Information Service Speed (Vs)
Tipe MT. TIEN THANH 26 Ballast Speed 12.0 Nm/hour
Year Built November 2010 Laden Speed 10.2 Nm/hour
Builder Vietnam Power Engine
Flag Vietnam Main Engine 1468 kW
Classification Vietnam 1 unit
DWT 2,952 ton Aux. Engine 291 kW
LWT 1,107 ton 3 unit
Payload 2,686 ton Specific Fuel Oil Consumption (SFOC)
Gross Tonnage (GT) 1,879 ton Main Engine (DO) 192 g/kWh
Main Dimension Auxiliary Engine (DO) 201 g/kWh
Length Over All (LOA) 79.6 m Specific Lube Oil Consumption (SLOC)
Length Between Perpendiculars (LBP) 74.7 m Main Eng & Aux. Eng 0.8 g/kWh
Breadth Moulded (B) 12.8 m Commision Days 330 days/year
Moulded Depth (H) 6.1 m Crews 20 person
Draft (T) 5.1 m

4. Freight Information
The freight information based on the interview, which will be used as a
benchmark in further calculation is shown in Table 3.8as follows:
As already mentioned in Section 2.2 that in the transaction of sea transport ser-
vices always involves at least two parties, shipowner and shipper (cargo owner).
In the transaction of trade between sellers and buyers, both parties can act as
a cargo owner depending on the ToD used. In a FOB term, the cargo owner is
the buyer of CPO, whereas in a CIF term the cargo owner is the seller.
After knowing the existing condition of the ToD, freight, ship specifications and
freight transactions as mentioned in the previous items, then we have to verify

42
 3.3 Evaluation of Shifting ToD

Table 3.8: Freight Information for Base Calculation

Item Remarks
$26/ton including unloading
Freight
cost
Unloading cost $2.4/ton
Sea Freight only $23.6/ton
Voyage charter for one voyage
Freight Transaction ⇒ mean that the freight only for
one way
Insurance unknown

the information by calculating the costs incurred by the shipowner. The aim of
this verification is to obtain the estimated costs of the sample ship, which will
be used as a basis for further calculation when freight estimation of different
route, different ship, and different volume of CPO is required.

Verification of Freight

As seen in Table 3.8 that the freight of US$26/ ton includes unloading cost,
where the unloading cost is US$2.4/ ton, and the freight only is US$23.6/ ton.
In this verification, we need to calculate the estimated shipping costs so that
the freight is equal to US$23.6/ ton for one voyage. In order to do this, we
have to categorize the shipping costs into two groups, fixed costs and variable
costs. Fixed costs are consisting of capital cost, operating cost and maintenance
cost, while variable costs consist of voyage cost and cargo handling cost. The
methodology we used to calculate these costs is as follows:
1. Capital Cost
Capital cost is the cost to finance the ship which depend on how the ship
has been financed and the ship price. Since the price information of the
ship is not available, then we collect ship price data of the same ship type
from different sources. The ships are in various size and DWT. Further-
more, by applying regression method; we can correlate the ship price and
DWT of the ship.
From the equation we have generated by applying the regression method,
then we estimate the ship price used in this case study. For 5-year-old ship
and by assuming of 25 years of economic life, the ship price is estimated
by US$ 8,346,036.
2. Operating Cost
Operating costs constitute the expenses involved in the day-to-day run-
ning of the ship. These costs consist of crew wages, stores and supplies,
lubricants, insurance and administration cost. In order to calculate these
costs, we use assumptions as follows:

43
3 Crude Palm Oil

a) Number of crews is 20 persons with average salary of US$ 1,921/

person/ month.
b) Stores and supplies are a function of the number of crews and their
provision per day, which is assumed to be US$7.60/ person/ day.
c) Lubricating cost depends on the specific lubrication oil consumption,
which is contained in the ship specifications (see Table 3.7).
d) Insurance cost is assumed to be 1% of the ship price.
e) Administration cost is assumed to be 5% of the total operating costs.
3. Maintenance Cost
Maintenance cost is a cost to maintain the ship, which can be divided into
two categories. First is an annual maintenance, which is assumed to be
1% of the ship price. Second is a special survey every 2 years, which is
assumed to be 4% of the ship price.
4. Voyage Cost
Voyage costs are variable costs associated with a specific voyage consisting
of fuel cost (main engine and auxiliary engine) and port cost. Fuel cost
depends on the fuel consumption of the engine, which is contained in the
ship specifications (see Table 3.7) and fuel price. Meanwhile, port costs
particularly for both port of origin and port of destination are as follows:

Table 3.9: Port and Cargo Handling Charges in Port of Selabak

Description Unit Value

Anchoring US$/GT 0.115

Mooring US$/GT 0.110
Pilotage - -
- Fixed tariff US$/movement 109
- Variable tariff US$/movement 0.04
Tugboat - -
- Fixed tariff - -
(2,001 - 3,500 GT) US$/movement 200
(3,501 - 8,000 GT) US$/movement 563
(8,001 - 14,000 GT) US$/movement 851
- Variable tariff US$/movement 0.01
Cargo Handling Cost US$/Ton 2.25

5. Cargo Handling Cost

Cargo handling cost is a cost incurred when the ship is loading or unload-
ing. The cargo handling cost depends on the type of cargo handled, type
of cargo handling equipment and port policy. This cost is not calculated
in this validation process since this cost is remaining the same regardless
the ToD used.

44
 3.3 Evaluation of Shifting ToD

Table 3.10: Port Charges and Cargo Handling Charges in Port Klang
No. Description Unit Value Remark

1 Port Dues US$/100 GT 1.44 76 GT < ships size < 35,000 GT

2 Quay Dues US$/100 GT 1.44 120 hours < duration < 240 hours
3 Consolidated Marine Charge US$ 720 Not exceed 100 meters
4 Pilotage Service US$ 0.72 per m LOA per movement
5 Tugboat Service US$ 2.28 per LOA per movement
6 Cargo Handling Charge US$/ ton 2.4 Foreign going ships
Source: http://www.westportsmalaysia.com/Conventional-@-Conventional_Tariff.aspx

After calculating the fixed costs as mentioned in the previous items, the next
step is the calculation of the voyage charter hire by calculating all fixed costs
for the rest of economic life of the ship. All costs are assumed to be increased
by 6% every year. By having all fixed costs for the rest of economic life of the
ship, we can calculate the annuity of these costs in order to estimate the voyage
charter hire.
By assuming that WACC (weighted average cost of capital) of 11.7%, the annu-
ity of this ship is US$1,920,880. By dividing this annuity of the fixed costs by
commission days per year - which assumed to be 330 days - can be obtained the
net voyage charter hire per day. By assuming that the profit of the shipowner is
10%, then the estimated voyage charter hire is US$ 6,721/ day.
The next step is calculation of the voyage cost for one voyage (one way) since
the information that we have to verify is for one voyage only. In order to calcu-
late this cost, we need to understand how long one voyage takes place, where
it can be calculated based on sea time and port time. Sea time depends on the
distance and speed of the ship, whereas port time is depending on the opera-
tional time of the ship in port (such as waiting time, approaching time and idle
time) and loading/ unloading time.
By assuming that operational time of the ship in port (not including loading/
unloading time) is 8 hours and 7 hours for port of origin and port of destination
respectively, and based on the specifications of the ship (see Table 3.7), main
facilities of ports (see Table 3.5 and 3.6), and port charges (see Table 3.9 and
3.10), then for one voyage we have results as follows:
From Table 3.11 above shows that calculated freight is US$26.43/ ton. The
error of calculated freight with the data freight of US$26/ ton is only 1.6%.
Since this error is relatively small, we are quite confident to use the calculation
method in this study for further calculation.

45
3 Crude Palm Oil

Table 3.11: Calculated Freight for One Voyage

Description Unit Value
Voyage Time days 7.00
Cargo Carried tons/voyage 2,687.00
US$/day 7,082.00
Voyage Charter
US$/voyage 56,659.00
Fuel Cost US$/voyage 5,818.00
Port Dues Origin US$/voyage 900.00
Port Dues Destination US$/voyage 1,102.00
Unloading cost US$/voyage 6,446.40
Fresh Water US$/voyage 70.00
US$/voyage 70,995.51
Total Freight
US$/ton 26.43

3.3.2 Further Calculation

Based on the calculation method as mentioned in the previous sub-section
where the error is relatively small, we used the same method in further cal-
culation. In this sub-section, we presented what-if scenario of the CPO export
when the shifting ToD from FOB to CIF is applied.
As already mentioned, the calculated freight in the previous sub-section is for
one voyage only with the shipment volume of 2,687 ton of CPO. In this sub-
section we are going to estimate what will happen if the Indonesian CPO export
conducted in different way and shipped by Indonesian-flag ships. In order to do
this calculation, we still use the same company with the same route, but with
different scenarios of shipment.
Based on the data from the company we used as a case study, the total export of
CPO of this company in 2015 was 175,342 ton/ year. By using this volume for
one year, then we developed scenarios of shipment based on the total volume
for one year instead of for one voyage by using the same type and size of the
ship. The scenarios of shipment are grouped into two groups based on the type
of freight transactions, as follows:
• Voyage Charter
In this scenario, the contract of shipment is conducted based on the total
volume for one year by using voyage charter scheme. In other words, the
cargo owner (in this case the seller of CPO, since it is a CIF term) buys sea
transport services from the shipowner for one year, instead of one voyage.
In this case, the cargo owner does not wish to become actively involved
as an transport operator.
• Time Charter
In this scenario, the cargo owners (the seller of CPO, since it is a CIF
term) hire ship(s) for a certain period and prefer to manage the transport
by themselves.

46
 3.3 Evaluation of Shifting ToD

Scenario 1: Voyage Charter

In this scenario, it is assumed that the contract to transport the CPO between the
cargo owner (CPO seller, since it is CIF term) and the transporter (shipowner)
is done in one-year period. In the voyage charter contract, the transport man-
agement is under shipowner responsibility.
Since the objective of the development of the scenario is to analyze the possibil-
ity of shifting the ToD from FOB to CIF, then in order to make an apple-to-apple
comparison, the volume of CPO transported and specification of ship used is
similar to the current condition (see Section Basic Calculation).
The freight in this scenario is calculated based on one-year voyage charter con-
tract with a specific demand of export for one year (175,342 tons/ year). Un-
der these conditions, the required frequency of ship to transport the cargo is 66
times/ year (by dividing the demand of export for one year with ship’s capacity),
whereas the frequency of one ship is 29 times/ year (by dividing commission
days in one year with one round-trip days). Therefore, it is required three ships
to transport the specific demand of export for one year.
Furthermore, the total freight is calculated by multiplying the total frequency
with all component costs per trip. The result of freight in this scenario is
US$6,038,480/ year or US$34.44/ ton.

Scenario 2: Time Charter

Scenario 2 is conducted to find out other alternatives of freight under time
charter contract. The main difference between Scenario 1 and Scenario 2 is
the charter period. A voyage charter is hiring a vessel based on the frequency
delivery of goods and specifications of the ship that is used for one-year pe-
riod. Meanwhile, a time charter is hiring a vessel by CPO seller (which is act as
the shipowner) based on whole one-year period (365 days). Basically, to avoid
volatility in voyage (spot) charter, shipowners may use the period of time char-
ter to control the costs, as they are protected from the freight rate fluctuations,
which are a feature of ‘spot’ market trading.
With the same calculation method as previous scenario, the required frequency
of ship to transport the cargo is 66 times/ year and the frequency of one ship to
transport the demand is 29 times/ year. Thus, we need three ships to be char-
tered for one-year period. Then the total freight for one year can be obtained,
yet there is one difference on how to calculate the freight. On this scenario, the
total freight is calculated based on fixed costs and variable costs.
Fixed cost is calculated by multiplying one-year period (365 days), time charter
hire per day and the amount of the ship (three ships). Meantime, variable costs
are calculated by multiplying the total frequency for one year with variable
costs (fuel, port charges, fresh water and cargo handling cost) incurred per
trip. Therefore, the result of total freight in this scenario is US$7,403,604/ year
or US$42.22/ ton.

47
3 Crude Palm Oil

If we compare these two scenarios, the freight on time charter is greater than
freight on voyage charter. The freight difference is caused by two reasons. First,
ship utilization on time charter is 71% (not optimal) because the export volume
is fewer than the payload capacity of the ship, whereas the ship utilization
under voyage charter is 100% to carry the export volume. Second, shipowner
(CPO seller) on time charter should bear all ship’s costs including during ship’s
non-operating time in one-year period, while shipowner on voyage charter only
bear the ship’s costs based on the required frequency to transport all cargoes.

Potential Freight for Indonesian Shipping Services

Potential freight means estimated freight for Indonesian shipping services from
export transaction regardless the terms of delivery that is used (either with
FOB or CIF terms). This section provides estimated freight of CPO export ship-
ments from the five biggest importing countries, which is India, the Nether-
lands, Malaysia, Singapore and Spain.
In order to define the potential freight, it is necessary to firstly understanding
the type of shipping charter to deliver the cargo. The main actor to determine
the type of shipping charter is shipowner (CPO seller in a CIF term). In reality,
shipowner will not always choose one type of ship to transport its cargo, either
only voyage charter or only time charter. However, shipowner will combine the
use of voyage charter and time charter to produce an optimal freight.
The selection of time charter depends on several circumstances. First, when
the contract volume of delivered cargo is a long-term period. Second, the
shipowner should have competency to manage the transport system (also act
as a cargo transporter). Third, the volume of delivered cargo is suitable with
ship’s specification to be chartered (when ship utilization is optimal).
On the other hand, voyage (spot) charter will be selected under several cir-
cumstances. First, the contact volume of delivered cargo could be a short-term
or long-term contact. However, the voyage charter is commonly used to trans-
port volume of cargo with short-term contract (less than one year). Second,
shipowner does not have competency to be a cargo transporter (only act as a
CPO seller).
From the explanation above, the potential freight is calculated under time char-
ter and voyage charter contracts. It is assumed that fixed costs consisting of
capital cost, operating cost and maintenance costs and variable costs consist of
voyage costs and cargo handling cost are similar with basic calculation assump-
tion (see Sub-section 3.3.1). Meanwhile, the distance depends on the length
between port of origin is Port of Dumai, Riau, Indonesia and port of destina-
tion on every importing country. The potential freight is calculated both under
voyage charter contract and time charter contract. One-way voyage is not cal-
culated because the ballast leg depends on the location of the ship in the spot
market, which is out of the study scope. Therefore, the result of potential freight

48
 3.4 Summary

for two scenarios is as follows:

Table 3.12: Potential Freight for CPO in Voyage Charter and Time Charter
Importing Freight (US$/year)
No.
Country Voyage Charter Time charter
1 India 103,554,927 97,850,407
2 Netherlands 73,460,679 69,321,968
3 Malaysia 8,821,322 10,043,252
4 Singapore 8,158,181 8,079,042
5 Spain 35,868,025 32,126,457
Total 229,863,134 217,421,126

Table (3.12) shows estimated potential freight for both voyage charter and time
charter. This means that Indonesian shipping companies have a potential freight
ranging from US$217,421,126 to US$229,863,134 in 2015. This estimated
freight presents about 86% of the total volume of CPO export and represents
approximately 5% of the total FOB value, which consists of CPO price, freight
and insurance.
This potential freight for CPO indicates that Indonesian shipping service has
an opportunity to serve these export shipments, yet shifting the ToD from FOB
to CIF should firstly look at the readiness of the national fleets (Indonesian-
flag fleets) in term of the quantity, quality, compatibility and reliability. Based
on the analysis, national shipping companies must have at least 536,000 DWT
(32 units of various size of chemical tanker) to serve the five biggest importing
countries of Indonesian CPO.
According to Indonesia Balance of Payment (2016), Indonesia was facing a to-
tal deficit of US$ 8.29 billion in 2015 and almost 74% deficit came from trans-
portation service. Overall, this potential freight for CPO export has a potential
to reduce the total deficit around 2.77% (potential freight = US$ 229.86 mil-
lion) .

3.4 Summary
1. The vast majority of Indonesian export products are shipped under Free
on Board (FOB) term. Under this term, foreign vessels transport most of
Indonesian CPO.
2. In terms of value and volume, Indonesia is the world’s largest exporter of
palm oil. It points out that Indonesia’s market position is strong as palm
oil producer compared to other countries. Meanwhile, Indonesian CPO
is transported to the five biggest importing countries by volume; they are
India, the Netherlands, Malaysia, Singapore and Spain.

49
3 Crude Palm Oil

It should be noted that Malaysia and the Netherlands are discovered as

the biggest importer as well as the largest producer of palm oil. These
two countries play the same role as re-exporter of Indonesian CPO, even
though Malaysia has basically a large palm oil plantation.
3. The type of ships commonly used to transport CPO is chemical tanker and
the average size of ship is General Purpose Tanker. Meantime, the ship-
ping service of palm oil is tramp shipping and the shipment is categorized
as bulk shipping.
Currently, foreign-flag vessels give a high contribution for Indonesian CPO
export. This caused by the availability of national ships and delivery time
of the demand may not always line up to each other because it is tramp
shipping.
Palm oil market shows that Malaysian or Singaporean companies orga-
nize almost trading and transport of Indonesian CPO. This condition also
evidence that approximately 22% of Indonesian CPO is exported with Sin-
gaporean and Malaysian vessels.
4. Potential freight of Indonesian shipping to export CPO ranging from US$
217.42 to US$229.86 million in 2015. From the trend line of CPO export,
this value may continue to grow in the near future because of two reasons.
First, the volume of export is increasing based on the trend line in the
past years. Second, the historical data indicates that there is possibility
of freight to reach the peak because the current freight rates is at rock
bottom.
5. The availability of national ships should be considered before shifting the
ToD from FOB to CIF. The decision to use a CIF terms is highly depending
on several variables ranging from price, quality and reliability. To promote
national shipping, Indonesia should have at least 536,000 DWT (32 units
of various size of chemical tanker) to serve the five biggest importing
countries of Indonesian CPO.
6. Only if national shipping company is ready to serve Indonesian CPO ex-
port to worldwide, then this potential freight for CPO has a potential to
reduce the total deficit in 2015 around 2.77% (potential freight = US$
229.86 million).

50
4 Coal

T
his chapter deals with the evaluation of shifting ToD from FOB term to
CIF term specific for Coal. As we did in Chapter 3, this chapter is started
from an overview of coal industry in Indonesia, followed by current
market condition of Coal. Analysis of the current market condition will be
conducted not only from supply side, but also from demand side. Analyzing
from supply side will include production capacity and the importance of coal in
term of export on the overall Indonesian export basket. Meanwhile, from the
demand side, the global market share of Indonesian coal will be elaborated as
well as the main importing countries.
Shipping market condition of coal transport will be discussed not only in In-
donesia but also worldwide in the second section. Types and sizes of ship
commonly used in transporting coal will be elaborated and will be used as a
benchmark in the further calculation process.
In the third section, we present the evaluation of shifting ToD of coal from FOB
term to CIF term, which is the main substance of this chapter. The evalua-
tion is conducted by comparing the existing ToD of coal in FOB term with the
calculated CIF term.
This chapter ends with concluding remarks containing a summary of the previ-
ous sections.

4.1 Commodity Market

4.1.1 Coal Industry in Indonesia

The Indonesian coal industry production and export will fall further this year,
as market conditions remain challenging. Indonesia has emerged as the world’s
largest exporter of thermal coal, supplying around one third of the seaborne
market.
Ministry of Energy and Mineral Resources of Republic of Indonesia has devel-
oped a series of guides to help existing and prospective holders understand the
regulation around the issue of permits, and their responsibilities as a permit
holder. The guide provides information about these permits can be found at
The 1945 Constitution Article 33.3, Law No. 4 of 2009 and consider the Gov-
ernment Regulation No. 22, 23, 78, 55 of 2010.

51
4 Coal

Figure 4.1: Coal Supply Chain[1]

Mining activities can take place through open cut or underground mining meth-
ods. The mining process involves the removal of overburden and extraction of
coal. After the coal extracted from the mines, most of coal is loaded into truck-
and-trailer road trains at stockpile in the mine site and hauled to private river
terminal. The trucks and trailers together have an average capacity of 130
tons. Hauling sometimes is done along an almost-straight and sealed haul road
owned by the companies.
All coal stockpiling, crushing and barge-loading activities handled in river ter-
minal. The trucks dump it into giant hoppers and enter a screening and crush-
ing system where it is broken into pieces. It is then conveyed either directly to
waiting barges or into one of two stockpiles for loading later.
Coal that is barged downriver from the river terminal is destined for delivery in
three ways: about 75% is barged straight to companies open-sea anchorage and
for transfer to international customers’ ships waiting there, about 20% is barged
directly to Indonesian customers via the Java Sea, and about 5% is barged to
companies coal storages and docksides loading facility.
Coal arriving by barge at open-sea anchorage must be loaded to waiting cus-
tomers’ vessels immediately. Some customers’ ships are geared and equipped
with their own cranes to load the coal from barges, but most are gear-less and
are loaded using floating cranes provided at the anchorage point. Coal that is
not transshipped at open-sea anchorage or barged directly to Indonesian cus-
tomers is taken to a companies’ storage and loading facility.

4.1.2 Production of Coal

Figure 4.2: Indonesian Coal Resources[7]

52
 4.1 Commodity Market

As one of the world’s largest producers and exporters of coal, there are three
largest regions of Indonesian coal resources: South Sumatra, South Kalimantan
and East Kalimantan. The Indonesian coal industry is rather fragmented with
only a few big producers and many small players that own coal-mines and
coal mine concessions. The country is leading exporter in thermal coal, which
consists of a medium-quality type (between 5100 and 6100 Cal/gram) and low-
quality type (below 5100 cal/gram). According to information presented by
the Ministry of Energy, Indonesian coal reserves are estimated to last around 83
years if the current rate of production is to be continued.
Since the early 1990s, when the coal mining was reopened for foreign invest-
ment, Indonesia witnessed a robust increase in production; coal exports and
domestic sales. Figure 4.3 illustrates the coal production in 2012-2015. It is
measured in volume by million tons. Overall, it can be seen that the coal ex-
ports tend to fluctuate, but the domestic consumptions increase slowly through-
out this time.

500
VOLUME (IN MILLION TONS)

92
400 102
64
49
300

200 382
348 356
327

100

0
2012 2013 2014 2015
YEAR

Export Domes!c

Source: Indonesian Coal Mining Association (APBI) and Ministry of Energy and Mineral Resources

Figure 4.3: Indonesian Coal Production, Export and Domestic Consumption

At the beginning of the period, the volume of export far exceeded that of do-
mestic, standing at 348 million tons compared to 64 million tons for domestic.
In 2013, both export and domestic increased respectively. Over the next two
years, export decreased quite considerably, dropping around 300 million tons
by 2015, while domestic’s volume had managed only a small increased.
Compared to other coal producers like America, Australia, China, and India,
Indonesia is anomaly. These countries generally have a level of production and
reserves larger than Indonesia, but their exports much lower. This is caused by
the difference in viewpoints in the utilization of resources.

53
4 Coal

4.1.3 Indonesian Coal Export

Coal export has been an engine of economic growth in Indonesia, however,

after reaching a peak in 2012, it has been in a steady decline due to lower
commodity prices and dwindling global demand.
As already mentioned in the previous section that major Indonesian export was
dominated by non- oil and gas, which accounted by 85% (US$24.2 billion) of
the total export value in 2015. Coal products belong to the sub-sector mining,
which is part of non-oil & gas sector. The contribution of coal export on total
Indonesia export basket was 10% in 2015 as shown in Figure 4.4.
0.02% Others

17.96% Mining

65.04% Coal

Non-Oil & Gas $ 137 Billion

(84.95%) 77.90% Industry

13.32% Copper Ore

0.00% Bauxite
Oil & Gas $ 24.2 Billion
21.63% Others

4.11% Agriculture

Source: Modified from Directorate General of Industry (2015)

Figure 4.4: Indonesian Export Commodities by Sectors

On the other hand, total Indonesian export in term of volume in 2015 was
509 million tons, while total coal export in term of volume on the same period
was 327 million tons. This means that the contribution of coal export on total
Indonesian export in term of volume in 2015 was 64%.

Figure 4.5: Proportion of Coal on the Total Export of Indonesia by Volume

54
 4.1 Commodity Market

4.1.4 Global Market Share

According to the International Trade Center (2015), top five producers of coal
are Australia, Indonesia, Russia, USA and Columbia. Global market share of
these top five producers in term of value (FOB prices) and volume can be seen
in Table 4.1 and 4.2.

Table 4.1: Total Value Top Five Exporting Countries

2013 2014 2015
Country
million $ % million $ % million $ %
Australia 38.24 34.2% 35.14 36.0% 29.63 38.8%
Indonesia 22.77 20.3% 18.70 19.2% 14.66 19.2%
Russia 11.82 10.6% 11.64 11.9% 9.48 12.4%
USA 11.25 10.0% 8.46 8.7% 5.67 7.4%
Colombia 6.25 5.6% 6.43 6.6% 4.26 5.6%
South Africa 5.83 5.2% 5.19 5.3% 4.25 5.6%
Others 15.78 14.1% 11.92 12.2% 8.40 11.0%
TOTAL 111.95 100.0% 97.47 100.0% 76.35 100.0%
Source: Modified from International Trade Center (2015)

Table 4.2: Total Volume of Top Five Exporting Countries

2013 2014 2015
Country
million ton % million ton % million ton %
Australia 355.42 26.6% 384.24 29.3% 386.11 32.0%
Indonesia 381.53 28.6% 356.30 27.2% 327.18 27.1%
Russia 138.98 10.4% 153.16 11.7% 152.66 12.6%
USA 125.56 9.4% 92.86 7.1% 72.76 6.0%
Colombia 74.76 5.6% 87.12 6.7% 72.79 6.0%
South Africa 76.29 5.7% 78.66 6.0% 81.84 6.8%
Others 182.01 13.6% 156.93 12.0% 114.52 9.5%
TOTAL 1,334.55 100.0% 1,309.27 100.0% 1,207.87 100.0%
Source: Modified from International Trade Center (2015)

Australia and Indonesia remained the world’s largest coal exporters in 2015,
with 32% and 27% of exports on a tonnage basis. This combined 59% of trade
was a record, despite Indonesia’s exports was declining by 9.8%, record exports
from Russia, and near record exports from both USA and Colombia.

4.1.5 Ports of Export

Port of export denotes as a place from where a shipment destined for a foreign
importer leaves the exporting or producing country. The table below illustrates
the percentage and total shipment of exporting port in 2011. Most of exporting

55
4 Coal

port owned by private companies called private ports or special purpose ports.
As an example of special purpose ports is located in South Kalimantan province
such as Port of Kotabaru and North Pulau Laut Coal Terminal.
Most of Indonesia’s exporting ports are transshipment terminal, which is lo-
cated inside of the river or far away from the coast. Coal transported from the
transshipment terminal to open-sea is anchoraged by barge and transferred to
international customers’ vessel. The other ports of export (non transshipment)
can directly accommodate to the customers’ vessel because the depth of the port
can meet the draft of the vessel.

Table 4.3: Ports of Export for Indonesian Coal by Shipment

Name of Port Province Shipment %
Muara Berau East Kalimantan 863 16%
Taboneo South Kalimantan 516 10%
Samarinda East Kalimantan 405 8%
Kotabaru South Kalimantan 376 7%
Tg. Bara East Kalimantan 351 7%
Others 2,773 52%
TOTAL 5,284 100%
Source: Modified from Directorate General of Sea Transportation (2011)

4.1.6 Main Importing Countries

Table 4.4 shows the main export destination countries for Indonesian coal such
as China, India, Japan and South Korea. Coal has a clear importance for In-
donesia’s state revenue as the commodity accounts for around 85% of mining
revenue.

Table 4.4: Top Five Importing Countries of Indonesian Coal by Volume

Importing Volume
%
Country (thousand tons)
China 99,280 24%
India 136,352 33%
South Korea 35,632 9%
Japan 35,585 9%
Taiwan 27,272 7%
Others 74,118 18%
TOTAL 408,238 100%
Source: Modified from Central Bureau of Statistics of Indonesia (2015)

Indonesia has strategic geographical position towards the giant emerging mar-
kets of China and India. Demand for low quality coal from these two countries

56
 4.1 Commodity Market

has skyrocketed as many new coal-fired power plants have been built to supply
electricity to their immense populations.
Overall, in 2014, the most significant importing countries of coal were India
and China, which together accounted for over half the proportion of coal ex-
port. While South Korea, Japan, Taiwan and other countries were only minimal
proportion over this year.
Based on the Table 4.4, coal transported to India comprised of 33% (136 mil-
lion tons) of the total volume. The second largest importing country came from
China, which was 24% (99,280 million tons) of the total, followed similar per-
centage from South Korea and Japan accounted for 9% (around 35,500 million
tons) respectively. Only small percentage transported to Taiwan at 7% (27,272
million tons) exports volume. Then, 18% or 74,118 million tons of the total
coal volume exported to Thailand, Philippines, Malaysia, USA, the Netherlands
and other countries.

4.1.7 Existing Terms of Delivery

Currently, most Indonesian exporters still utilize the free on board (FOB) sys-
tem for transporting goods overseas, through which they pass the risk of loss
to buyers who pay the cost of insurance and freight, although there are few
transactions using the cost and freight (CFR) system. Figure 4.6 presents the
implementation of Incoterms in Indonesia for Coal product based on top five
coal companies in Indonesia.

Figure 4.6: The Implementation of Incoterms for Indonesian Coal Export

This scheme illustrates the terms of delivery (ToD) that has been used in In-
donesia. Overall, it can be seen that coal export products are directly deliver
from seller (Indonesia) to end user (importing country/ buyer) either with FOB
term or CFR term. Almost ToD that has been used for coal export is dominated
by FOB, although the used of CFR is possible for only few companies under
certain conditions. First, the buyer might use CFR as ToD for coal export if the
freight offered is relatively lower than freight, which is produced by the com-
pany itself. Second, the freight that is offered in CFR term should not higher
than 8% of the coal price.

4.1.8 Coal Benchmark Price

The Benchmark Price for mining products must be determined pursuant to a
market mechanism and/or in accordance with prevailing prices in international

57
4 Coal

markets. In selling mining products, Production Operation IUP/IUPKs hold-

ers are obliged to comply with the Benchmark Price, which is applicable to
sales made to either domestic parties or foreign parties (pursuant to export
trading activities) and any sales made to affiliate of the Production Operation
IUP/IUPKs holders.
Government Regulation 23, as further elaborated by Ministry Regulation No.
17 provides the framework, which authorizes the Minister to set the mineral
and coal sales reference prices. Broadly, the Minister, will be responsible for
setting the Benchmark prices for coal and metallic minerals.
The Benchmark price is set at the Free on Board (FOB) vessel point of sale.
Accordingly, certain costs are accepted to adjust the Benchmark price if the
delivery takes place at a point other than the FOB vessel (i.e. FOB barge or
CIF). The allowable adjustments would include the costs of barging, surveyors,
insurance and transshipment.[16]
The Benchmark price serves as the floor price for the Government Royalty cal-
culation. If the actual sales price is higher than the Benchmark price, the Gov-
ernment Royalty will be based on the actual sales price. If actual sales are below
the Benchmark price, the Government Royalty calculation should be performed
based on the Benchmark price.
The Benchmark price is applicable for spot sales and long-term sales. The Gov-
ernment Royalty will determine the Coal Benchmark Price on a monthly basis
and accordance with market prices. The coal benchmark price shall distinguish
between the following:
1. The benchmark price for steam (thermal) coal, being coal used as fuel for
power plants and steam machines in industries (“Steam Coal”); and
2. The coal benchmark price for coking (metallurgical) coal, being coal used
in iron smelting industries or metallurgy (“Coking Coal”).

120.00
95.48
Average Value FOB (in USD/ton)

100.00
82.92
80.00 73.00
60.13
60.00 51.86

40.00

20.00

0.00
2012 2013 2014 2015 2016

Year Over Year

Source: Modified from Ministry of Energy and Mineral Resources (June 2016)

Figure 4.7: Average Coal Price Per Year (2012-2016)

58
 4.2 Shipping Market

Indonesia’s benchmark thermal coal reference price (in Indonesia: Harga Batubara
Acuan, or HBA), fell by 14% to a new record low of 51.86 US$/ton (FOB) in
2016 from 60.13 US$ in 2015. However, the month-on-month decline is smaller
than decline recorded in the preceding months. Demand from Indonesia’s main
export markets is not expected to improve significantly in the short-term. On
the other hand, domestic coal demand may grow in the year ahead due to accel-
erating economic growth, growing industrial output and new coal-fired power
plants that are coming online [8].

4.2 Shipping Market

The transport system in the shipping industry has developed to carry many
diverse ranges of commodities and each handling a different group of trades.
In other words, the type of ship depends on the type of cargo carried. For
example, energy and mining product trades are dominated by bulk shipping.
This group of commodities, which accounts for close to half of seaborne trade,
includes coal products. Since coal products is categorized as a dry bulk because
it has to be shipped from one shipper to one consignee in a big amount, then the
evaluation of shipping market in this section will focus on the dry bulk shipping
industry.

4.2.1 Ship Type

As already stated in Section 2.2, the type of ships commonly used to transport
coal belongs to the group of dry bulk carrier due to the large volume and long
haul shipping, while barge also utilized to transport the cargoes due to the lim-
ited access in canal and river area, short draught and short distance shipping.
On the basis of products, dry bulk cargo is generally categorized as either major
bulk or minor bulk. Major bulk cargo constitutes the vast majority of dry bulk
cargo by weight such as iron ore, coal and grain. Minor bulk cargo includes
products such as agricultural products, mineral cargoes, cement, forest products
and steel products [12]. Demand of dry bulk products in the last three years
can be seen in Figure 4.8.
In terms of number of ships used, global dry bulk fleet as a whole has only
grown by 0.5% since early February 2015. This has happened as the demol-
ished volumes have matched the number for new buildings being delivered [3].
The Capesize fleet is actually smaller today than one and half year ago. The de-
velopment in Panamax and Handysize segment is flat, whereas the Handymax
or Supramax segment has slightly grown.
However, the growth in tonnage still exceeds the growth in demand, which
results in overcapacity, though this factor is obscured by slow steaming, which
keeps ship capacity on sea for longer periods of time. Overall, the tonnage

59
4 Coal

Sources: BIMCO, Simpson Spence Young Consultant

Figure 4.8: Demand of Dry Bulk Carrier in Volumes

will increase in 2016 due to a higher delivery pace and a decline in carrier’s
scrapping rate. Following in 2016, the tonnage influx is expected to remain flat
in the period 2017 to 2019. The global dry bulk carrier trend can be seen in
Figure 4.9.

Source: BIMCO estimates on Clarksons raw data[3]

Figure 4.9: Trend of Global Dry Bulk Carrier

4.2.2 Indonesian Fleet Availability

One of the objectives of this study is to evaluate the availability of Indonesian

fleet to potentially offer the service to replace foreign-flag ships. Therefore, we

60
 4.2 Shipping Market

present the availability of Indonesian fleet to carry Indonesian coal.

Source: Modified from Directorate of Seaborne Traffic (2011)

Figure 4.10: Coal Transportation for Export

According to the Ministry of Transportation, the type of vessel that is used for
coal exports divided in three categories namely motor vessel or dry bulk carrier,
tugboat with barge and only barge. It is clear that the largest proportion to
export the coal went on motor vessel or dry bulk carrier for 89% (4,687 ship-
ments) of the total shipment in 2011. The second position is tugboat with barge
at 10% (545 shipments) and followed by barge with only 1% (53 shipments)
of the total shipment.

Source: Modified from Directorate of Seaborne Traffic (2011)

Figure 4.11: Type of Indonesian-flag Vessel for Coal

According to the Ministry of Transportation, the type of vessel, which is suitable

for coal exports is motor vessel (dry bulk carrier) as can be seen in Figure 4.11.

61
4 Coal

This motor vessel accounted only 47 units (6.1%), while other type of vessels
is not very suitable for long haul shipping. Furthermore, more than 90% of
Indonesian-flag vessel is barge and mostly used for domestic or short distance
transport, while coal exports served by foreign vessels. This condition indicates
that for export purposes, Indonesia is still lack of dry bulk carrier especially for
transporting Coal.

4.2.3 Shipments of Indonesian Coal

According to the Ministry of Transportation, in 2011 there were 5,258 ship-

ments of Coal export, where 1,915 shipments or 34% transported with Panamax
Size and followed by Supramax dry bulk carrier with 1118 shipments or 21%.
Meanwhile, the proportions of shipment were quite similar for Post-Panamax
and Small vessels at 12% and 13% respectively. Furthermore, Handysize and
Handymax had the same proportion at 7% of the total shipment. The last one,
Capesize vessels is focused on long haul coal trade, which accounted for 4% of
total shipment. The proportion of shipment of Indonesian Coal by size of ships
can be seen in Figure 4.12.

Source: Modified from Directorate of Seaborne Traffic (2011)

Figure 4.12: Shipment of Indonesian Coal by Size of Ships

In terms of flag states, there are five biggest flag states of dry bulk carrier
used for Indonesian Coal export. The big five of the flag states of dry bulk
are Panama, Singapore, Hong Kong, Liberia and Marshall Island. The propor-
tion of flag states of dry bulk carrier for Indonesian Coal export can be seen in
Figure 4.13.

62
 4.3 Evaluation of Shifting ToD

Source: Modified from Directorate of Seaborne Traffic (2011)

Figure 4.13: The Big Five Flag States for Indonesian Coal Export

From the big five flag states, there are three countries that implement Flag of
Convenience (FOC), which is closely related to open registry term. These three
countries are Panama, Liberia and Marshall Island with the total proportion of
47% of total ships used.

4.3 Evaluation of Shifting ToD

4.3.1 Basic Calculation

As already stated in Section 4.1, Coal is always shipped in bulk, therefore, eval-
uation of shifting ToD is conducted by applying common characteristics of bulk
shipping.

Based on the standard of trade terms in Incoterms (see Section 2.1) the division
of responsibility between sellers and buyers in FOB term and CIF term can be
seen in Figure 3.17. Similar to previous calculation, this study will focus on
area of sea freight and insurance cost. The insurance cost is market driven
and will not calculate in detail. Meanwhile the unloading cost is not calculated
regarding to the freight contract. The only cost that will be calculated and to
be compared is sea freight.

We used one route taken from one of the biggest Coal exporter in Indonesia
in this basic calculation. The route selected as a case study is from Port of
Samarinda, East Kalimantan to Port of Guangzhou, China with the total dis-
tance of 1,900 nautical miles as seen in Figure 4.14 below.

63
4 Coal

Figure 4.14: Selected Routes of Coal for Case Study

Based on the information gathered from the interviewe with one of the biggest
exporters in Indonesia1 , Coal from Port of Samarinda to Port of Guangzhou
mostly shipped by dry bulk carrier with the size of about 73,000 DWT and
payload capacity of about 65,000 tons. The freight in the past year has been
fluctuated ranging from US$4.1 - 8.5 per ton where the current freight is US$
6.00 per ton. It should be noted that this freight is only consist of sea freight
for the transaction of voyage charter for one voyage.
1. Port of Origin
Port of Samarinda is the busiest public port in East Kalimantan, which
has two-anchorage area, first in Muara Pegah (Muara Jawa) and Muara
Berau. The main facilities and equipment of Port of Samarinda can be
seen in Table 4.5 below:

Table 4.5: Port of Samarinda Main Facilities

Port Facilities Specifications Unit
Harbor type River Port
Transshipment area Muara Pantai
Dry bulk depth 7.9 mLWS
Anchorage depth 23.2 mLWS
Type of loading/unloading Floating Crane
- Productivity 15,000 ton/day

2. Port of Destination
Port of destination in this case study is Port of Guangzhou, China. This
port lies at the estuary of the Pearl River in South China coast, consisting
1
As per company requested, the company name is not mentioned in this report

64
 4.3 Evaluation of Shifting ToD

of seaport and inland river port. The terminal dedicated for Coal is located
in Xinsha Port Area, which is the largest port in South China for loading
and unloading one of the region’s major energy sources. Main facilities
and equipments of Xinsha Port Terminal is as follows:

Table 4.6: Port of Guangzhou Main Facilities

Port Facilities Specifications Unit
Harbor type River Port
Transshipment area Pearl River Delta
Dry bulk depth 15.6 mLWS
Anchorage depth 22.5 mLWS
Berths length 809 m
Type of loading/unloading Clamshell Crane
- Productivity 20,000 ton/day

3. Ship Specification

As already mentioned, the ship used in this case study is based on the
information we had during the interview with the company. This ship is
a dry bulk carrier with the type of freight transaction is freight contract
(voyage charter) for one voyage. The specifications of the ship is shown
in Table 4.7 as below:

Table 4.7: Specifications of Ship Used in Coal Case Study

4. Freight Information

The freight information based on the interview which will be used as a

benchmark in further calculation is as follows:

65
4 Coal

Table 4.8: Freight Information for Base Calculation

Item Remarks
Freight $6.00/ton (only sea freight)
Voyage charter for one voyage
Freight Transaction ⇒ mean that the freight only for
one way
These cost is not including in
Loading/ Unloading cost
the freight rates
Insurance unknown

Similar to CPO case study, after understanding the current condition of the ToD,
freight, ship specifications and freight transactions as mentioned in the previous
items, then we have to verify the information by calculating the costs incurred
by the shipowner. The aim of this verification is to obtain the estimated costs
of the sample ship, which will be used as a basis for further calculation when
freight estimation of different route, different ship, and different volume of Coal
is required.

Verification of Freight

In this verification, we need to calculate the estimated shipping costs such as

the freight is equal to $6.00/ton for one voyage as seen in Table 4.8. In order
to do this, we have to categorize the shipping costs into two groups, fixed costs
and variable costs. Fixed costs are consisting of capital cost, operating cost and
maintenance cost, while variable costs are consisting of voyage cost and cargo
handling cost. The methodology we used to calculate these costs is as follows:
1. Capital Cost
Similar with the previous case study, the estimation of ship price is col-
lected by regression method. For 10-year-old ship and by assuming of 25
years of economic life, the ship price is estimated of US$ 21,665,765.
2. Operating Cost
Operating costs are fixed costs, which constitute the expenses, involved
in the day-today running of the ship. In order to calculate these costs, we
use assumptions as follows:
a) Number of crews is 24 persons with average salary of US$1,825 /
person/ month.
b) Stores and supplies are a function of the number of crew and their
provision per day, which is assumed to be US$7.64/ person/ day.
c) Lubricating cost is depend on the specific lubrication oil consumption
which is contained in the ship specifications (see Table 4.7).
d) Insurance cost is assumed to be 1% of the ship price.

66
 4.3 Evaluation of Shifting ToD

e) Administration cost is assumed to be 5% of the total operating costs.

3. Maintenance Cost
Maintenance cost is divided into two categories. First is an annual main-
tenance, which is assumed to be 1% of the ship price. Second is a special
survey every 2 years, which is assumed to be 4% of the ship price.
4. Voyage Cost
Voyage costs are variable costs associated with a specific voyage consisting
of fuel cost (main engine and auxiliary engine) and port cost. Fuel cost
depends on the fuel consumption of the engine (see Table 4.7) and fuel
price. Meanwhile, port costs are considering for both port of origin and
port of destination are as follows:

Table 4.9: Port and Cargo Handling Charges in Port of Samarinda

Description Unit Value

Anchoring US$/GT/Call 0.12

Mooring/Unmooring US$/GT 0.11
Pilotage - -
- Fixed tariff US$/movement 109
- Variable tariff US$/movement 0.04
Tugboat - -
- Fixed tariff - -
(26,001 - 40,000 GT) US$/movement 1,855
(40,001 - 75,000 GT) US$/movement 1,952
> 75,000 GT US$/movement 2,342
- Variable tariff US$/movement 0.01
Cargo Handling Cost US$/Ton 2.25

Table 4.10: Port and Cargo Handling Charges in Port of Guangzhou

Description Unit Value

Anchoring US$/GT/day 0.23

Mooring/Unmooring - -
Vessel of <2000 GT at buoys US$/service 23.85
Vessel of >2000 GT at buoys US$/service 47.70
Opening/Closing Hatches - -
Vessel of 2000 GT and US$/hatch 39.60
below US$/hatch 79.50
Vessel of 2000 GT and above
Pilotage US$/GT 0.08
Shifting US$/GT 0.03
Pilot Time Lost for Waiting US$/GT 3.00
Cargo Handling Cost US$/Ton 2.03

67
4 Coal

5. Cargo Handling Cost

Cargo handling cost is not calculated in this validation process since this
cost is remaining the same regardless the ToD used.

Basic calculation process has the same method as previous case study to define
the voyage charter hire by calculating all fixed costs for the rest of economic life
of the ship and then to calculate the annuity of these costs in order to estimate
the voyage charter hire. As a result of this calculation, the estimated voyage
charter hire is US$12,863/ day.
The next step is calculation of the voyage cost for one voyage (one way) since
the information that we have to verify is for one voyage only. Calculation of
this cost is based on sea time and port time assumption.
By assuming that operational time of the ship in port (not including loading/
unloading time) is 6 hours for both origin and destination ports, specifications
of the ship (see Table 4.7), main facilities of ports (see Table 4.5 and 4.6),
and port charges (see Table 4.9 and 4.10), then the result for one voyage is as
follows:

Table 4.11: Calculated Freight for One Voyage

Description Unit Value
Voyage Time days 16.00
Cargo Carried tons/voyage 67,034.00
US$/day 15,283.00
Voyage Charter
US$/voyage 244,523.00
Fuel Cost US$/voyage 117,423.00
Port Dues Origin US$/voyage 16,840.00
Port Dues Destination US$/voyage 41,940.00
Fresh Water US$/voyage 416.00
US$/voyage 421,142.00
Total Freight
US$/ton 6.28

Table 4.11 shows that the calculated freight is US$6.28/ ton. The error of
calculated freight with the data freight of US$6.00/ton is only 4.5%. Since this
error is relatively small, we are confident to use this calculation method in this
study for the further calculation.

4.3.2 Further Calculation

Further calculation illustrated what-if scenario of the coal export when the shift-
ing ToD from FOB to CIF is implemented. The calculation method used for this
scenario is based on the basic calculation in the previous sub-section.
On basic calculation, the calculated freight is for one voyage only with the
shipment volume of 67,034 ton of coal. This sub-section will estimate what

68
 4.3 Evaluation of Shifting ToD

will occur if the export of coal is conducted in different way and shipped by
Indonesian-flag ships. In order to do this calculation, we use the same company
with the same route, type and size of ship, whereas the only difference is the
scenario of shipment.
The total export of coal of this company was 20,328,000 ton in 2015. By using
this volume export for one year, then we developed scenarios of shipment for
the total volume for one year instead of for one voyage. There are two scenarios
of shipment based on the type of freight transactions:
• Voyage Charter
In this scenario, the contract of shipment is conducted for the total vol-
ume for one year by using voyage charter scheme. In other words, the
cargo owner (in this case the seller of coal, since it is CIF term) buys sea
transport services from the shipowner for one year, instead of one voyage.
In this case, the cargo owner does not wish to become actively involved
as an transport operator.
• Time Charter
In this scenario, the cargo owners (the sellers of coal, since it is CIF term)
hire ship(s) for a certain period and prefer to manage the transport by
themselves.

Scenario 1: Voyage Charter

As previously mentioned, the contract to transport the coal between the cargo
owner (coal seller, since it is CIF term) and the transporter (shipowner) is done
in one-year period. In the voyage charter contract, the transport management
is under shipowner responsibility.
Since the objective of the development of the scenario is to analyze the possibil-
ity of shifting the ToD from FOB to CIF, then in order to make a commensurable
calculation, the volume of coal transported and specification of ship used are
similar to the current condition (see Section Basic Calculation).
The freight in this scenario is calculated based on one-year voyage charter con-
tract with specific demand of export for one year (20,328,000 tons/ year). Un-
der this conditions, the required frequency of ship to transport the cargo is 304
times/year (by dividing the specific demand of export for one year with specific
ship’s capacity), while the frequency of one ship is 15 times/ year (by dividing
commission days in one year with one round-trip days). Therefore, we need at
least 21 ships to transport all cargo for one year.
Afterwards, the total freight is calculated by multiplying the total frequency
with all component costs per trip. The result of freight in this scenario is US$
158,888,019/ year or US$7.82/ ton.

69
4 Coal

Scenario 2: Time Charter

While scenario 2 is conducted to find out other alternatives of freight under

time charter contract. The main difference between Scenario 1 and Scenario
2 is the charter period. A voyage charter is hiring a vessel based on the fre-
quency delivery of goods and specifications of the ship that is used for one-year
period. While a time charter is hiring a vessel by Coal seller (which is act as the
shipowner) based on whole one-year period.
With the same calculation method as previous scenario, the required frequency
of ship to transport the cargo is 304 times/year, while the frequency of one ship
is 17 times/ year. Thus, we need 18 ships to be chartered for one-year period.
Then the total freight for one year can be obtained, yet there is one difference
on how to calculate the freight. On this scenario, the total freight is calculated
based on fixed cost and variable costs.
Fixed cost is calculated by multiplying the commission days for one year (365
days), time charter hire per day and amount of the ship required (18 ships).
Meantime, variable costs are calculated by multiplying the total frequency for
one year with variable component costs per trip. Therefore, the result of total
freight in this scenario is US$ 149,147,106/ year or US$ 7.34/ ton.
If we compare these two scenarios, the freight on time charter is cheaper than
freight on voyage charter. This occurs because the ship utilization on time char-
ter is 100% (optimal) because the regularity of cargoes shipped and the ship
utilization are at the equilibrium point, whereas the ship utilization under voy-
age charter is at 97% to carry the export volume.
It can be concluded that the freight rates are determined by the ship utilization.
Meanwhile, the optimal freight rates can be reached when the ship utilization
is optimal or by condition that demand (export volume) must be equal to the
supply (ship’s capacity).

Potential Freight for Indonesian Shipping Services

Potential freight means estimated freight for Indonesian shipping services from
export transaction regardless the terms of delivery that is used (either with FOB
or CIF terms). This section provides estimated freight of coal export shipment
from the five biggest importing countries, which is China, India, South Korea,
Japan and Taiwan.
In order to define the freight for each importing countries, it is assumed that
fixed costs consisting of capital cost, operating cost and maintenance costs and
variable costs consists of voyage costs and cargo handling cost are similar to
basic calculation assumption. Meanwhile, the distance depends on the length
between origin and destination ports. The assumption of origin port is Port of
Samarinda, Kalimantan, Indonesia; whereas the destination port is depend on
every country. The destination port is assumed by the highest shipment of coal.

70
 4.4 Summary

The type of shipping charter to transport coal is similar to previous study (see
Sub-Section 3.3.2). The potential freight is calculated under time charter and
voyage charter contracts. Therefore, the result of potential freight for two sce-
narios is as follows:

Table 4.12: Potential Freight for Coal in Voyage Charter and Time Charter
Importing Freight (US$/year)
No.
Country Voyage Charter Time charter
1 China 916,923,305 856,006,807
2 India 1,036,555,336 971,235,636
3 South Korea 344,926,231 315,387,363
4 Japan 330,992,234 311,446,440
5 Taiwan 221,243,164 210,110,589
Total 2,850,640,270 2,664,186,835

Table (4.12) shows estimated freight for both voyage charter and time charter.
This means that Indonesian shipping service has a potential freight ranging
from US$2,664,186,835 to US$2,850,640,270 in 2015. This potential freight
presents about 98% of the total volume of coal export and represents around
17% of the total FOB value, which consists of coal price, freight and insurance.
This potential freight for coal proves that Indonesian shipping service has a big
opportunity to serve this export shipment, which is currently served by foreign
vessels. Nevertheless, to shift in the ToD from FOB to CIF should firstly look at
the condition of national fleet from quantity, quality, compatibility and reliabil-
ity. From the further analysis, national shipping must have at least 16,249,000
DWT (270 unit of various size of dry bulk) to serve the five biggest importing
countries of Indonesian coal.
According to Indonesia Balance of Payment (2016), Indonesia was facing a to-
tal deficit of US$ 8.29 billion in 2015 and almost 74% deficit came from trans-
portation service. Overall, this potential freight for coal export has a potential
to reduce the total deficit around 34.38% (potential freight = US$ 2.85 billion).
By this percentage, it indicates the highly potential for serving Indonesian coal
export by optimizing the use of Indonesian-flag vessels (barge and tug boat),
particularly to transport among Asia countries.

4.4 Summary
1. Most Indonesian coal exporters still utilize the free on board (FOB) system
for transporting goods overseas, although there are few transactions using
the cost and freight (CFR) system. The buyer might use CFR as ToD for
coal export if the freight offered is relatively lower than freight produced
by the buyer itself.

71
4 Coal

2. In terms of value and volume, Indonesia is the second world’s largest

exporter for thermal coal after Australia. Coal has a clear importance for
Indonesia’s state revenue as the commodity accounts for around 85% of
mining revenue. The medium-quality type and the low-quality type of
Indonesian coal mostly fulfill the large demand from China and India as
many new coal-fired power plants have been built to supply electricity to
their immense populations.
3. The type of ships to transport coal depends on the distance to be cov-
ered. Tug and barges used for short distances within domestic markets
or ASEAN countries and also as transshipment facilities to customers’ ves-
sel, whereas dry bulk carrier used for long distances such as international
shipment. The average size of dry bulk vessel is Panamax vessel because it
is shipped in large quantities. Meanwhile, the shipping service is catego-
rized as tramp shipping and the shipment is categorized as bulk shipping.
In fact, more than 90% of Indonesian-flag vessel is barge and mostly used
for domestic or short distance transport, while coal exports served by for-
eign vessels. This condition indicates that for export purposes, Indonesia
is still lack of dry bulk carrier especially for transporting Coal.
However, approximately 10% (45 million tons) of the coal export is served
by tug boat and barge. Therefore, with abundance national tugboat and
barge, Indonesia has a potentiality to serve short distance shipment and
to shift the existing ToD to CIF terms.
4. Potential freight of Indonesian shipping to export Coal ranging between
US$2.66 to US$2.85 billion in 2015. From the trend line of Coal export,
this value may continue to grow in the near future because the volume
of export is increasing in the past years. Nevertheless, the freight value
might be decreasing due to the freight market condition, which indicates
continuous decline in the past years.
5. The availability of national ship should be considered first in order to shift
the ToD from FOB to CIF. The decision to use CIF terms is highly depend
on several variables ranging from price, quality and reliability. Indonesia
should have at least 16.25 million DWT (270 unit of various size of dry
bulk) to serve the five biggest importing countries of Indonesian Coal.
6. Only if national shipping company is ready to serve Indonesian coal ex-
port to worldwide, then this potential freight for coal has a potential to
reduce the total deficit in 2015 around 34.38% (potential freight = US$
2.85 billion). It indicates the highly potential for serving Indonesian coal
export by optimizing the use of Indonesian-flag vessels (barge and tug
boat), particularly to transport among Asia countries.

72
5 Rubber

T
his chapter deals with the evaluation of shifting ToD from FOB term to
CIF term for Rubber particularly. As we did in Chapter 4, this chapter
is started from an overview of natural rubber industry in Indonesia, fol-
lowed by current market condition of rubber. Analysis of the current market
condition will be conducted not only from supply side, but also from demand
side. Analyzing from supply side will include production capacity and the im-
portance of rubber in term of export on the overall Indonesian export basket.
Meanwhile, from the demand side, the global market share of Indonesian rub-
ber will be elaborated as well as the main importing countries.
In the second section, we discuss the shipping market condition of rubber trans-
port for both Indonesia and global market. The common types and sizes of ship
used in transporting natural rubber will also be presented.
In the third section, we present the evaluation of shifting ToD of rubber from
FOB term to CIF term. The evaluation is conducted by comparing the existing
ToD of rubber in FOB term with the calculated CIF term.
This chapter ends with a concluding remarks containing a summary of the pre-
vious sections.

5.1 Commodity Market

5.1.1 Rubber Industry in Indonesia

Natural rubber is produced from plant species Hevea brasiliensis. Rubber in In-
donesia acts as a strategic commodity, foreign exchange generator of exports, a
source of livelihood for many farmers, supporting environmental sustainability
and biodiversity resources. This plant is very effective at absorbing carbon diox-
ide (CO2) pollutant about 35 tons per hectare per year, and at the same time
releasing the oxygen (O2) about 23 tons per hectare per year. In other words,
this plant is environmental friendly by environmental conservation, absorbing
carbon and producing oxygen.
According to the government regulation, the only type of rubber to be sold in
world market is processed rubber or crumb rubber. Rubber factories or crumb
rubber processors could be seen as important players of rubber in the world

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5 Rubber

market, as the Indonesian rubber production is mostly allocated to fulfill the

world demand of natural rubber.

Natural rubber supply chain in Indonesia from farm workers to trade-brokers

can be seen in Figure 5.1.

Figure 5.1: Natural Rubber Supply Chain

The production system of natural rubber in Indonesia involves mostly small-

holder growers or farm workers. The latex produced by these smallholders
sells to the agents or collectors who collect latex directly from growers or farm
workers. Normally the agents can be found in every place of rubber production
center. In the city-level, there is middleman (big collectors) who will buy the
rubber materials from village collectors to be traded in city-level or provincial-
level. Middleman commonly own small trucks for transporting rubber from
villages to the city for further process in crumb rubber factories.

5.1.2 Production of Rubber

According to the Gapkindo (Indonesian Rubber Association), Asia has been the
largest rubber producing continent due to its economic and population growth.
Asia accounts for about 93% of the world natural rubber production with Thai-
land being the largest producer followed by Indonesia and Vietnam.

Figure 5.2: Indonesian Rubber Resources

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 5.1 Commodity Market

Source: Modified from Indonesian Rubber Association (2015)[14]

Figure 5.3: Indonesian Rubber Production Sites by Province

As the second largest natural rubber producer globally, the rubber production
centers in Indonesia are commonly located in Sumatra such as the provinces of
North Sumatra, Riau, Jambi, and South Sumatra; followed by Kalimantan such
as the provinces of West Kalimantan, some in Central and South Kalimantan;
but very few in Java, Sulawesi and Papua. Therefore, Sumatra and West Kali-
mantan are the key natural rubber producing area accounted by two third of
the natural rubber harvested.

5.1.3 Indonesian Rubber Export

Sources: Modified Directorate General of Industry and Indonesian Rubber Association (2015)

Figure 5.4: Indonesian Export Commodities by Sectors (value in billion $)

Natural rubber is one of estate commodities playing important roles in Indone-

sian economy. It not only serves as a source of community income and wealth,
but also drives economic growth in new economic centers surrounding the rub-
ber estate. In addition, this commodity also significantly contributes a source of
state foreign exchange since 84% of the Indonesian natural rubber are exported

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5 Rubber

as raw rubber, while only the rest 16% is consumed by domestic market. As an
export commodities, natural rubber contributing about 6% or $6.2 billion from
the total industrial sub-sector or the fifth largest export in value after palm oil,
metal goods, garments, and processed food. Rubber is also the main commodity
contributing the most foreign exchange from estate sub-sector.
In terms of volume, Indonesia rubber exported around 2.63 million tons to
destination countries, whereas domestic rubber consumption is accounted by
0.54 million tons in 2015. According to the data presented from Central Bureau
of Statistics of Indonesia, the total volume of natural rubber exported in 2015
was only one percent of the total export basket of Indonesia, which accounted
for 509 million tons.

5.1.4 Global Market Share

According to the International Trade Center (2015), top five producers of coal
worldwide are Thailand, Indonesia, Vietnam, Malaysia and Cote d’Ivore. Global
market share of these top five producers in term of value (FOB prices) and
volume can be seen in Table 5.1 and 5.2.

Table 5.1: Total Value Top Five Exporter Countries

2013 2014 2015
Country
million $ % million $ % million $ %
Thailand 8.23 31.7% 6.02 35.6% 4.98 37.8%
Indonesia 6.91 26.6% 4.74 28.1% 3.70 28.1%
Vietnam 2.38 9.1% 1.67 9.9% 1.07 8.1%
Malaysia 2.23 8.6% 1.40 8.3% 1.03 7.9%
Cote d’Ivore 0.76 2.9% 0.60 3.6% 0.50 3.8%
Others 5.49 21.1% 2.47 14.6% 1.89 14.3%
TOTAL 26.00 100.0% 16.91 100.0% 13.17 100.0%
Source: Modified from International Trade Center (2015)

Table 5.2: Total Volume of Top Five Exporter Countries

2013 2014 2015
Country
million ton % million ton % million ton %
Thailand 3.44 36.3% 3.41 36.5% 3.65 39.1%
Indonesia 2.70 28.5% 2.62 28.1% 2.63 28.2%
Vietnam 0.99 10.5% 0.98 10.5% 0.73 7.8%
Malaysia 0.85 8.9% 0.72 7.7% 0.71 7.6%
Cote d’Ivore 0.26 2.7% 0.35 3.8% 0.41 4.4%
Others 1.23 13.0% 1.24 13.3% 1.20 12.9%
TOTAL 9.47 100.0% 9.33 100.0% 9.33 100.0%
Source: Modified from International Trade Center (2015)

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 5.1 Commodity Market

Asia accounts for 93% of the world’s natural rubber production with Thailand
being the largest producer followed by Indonesia and Vietnam. Thailand ex-
ports about 39% in the amount of 3.65 million tons of rubber world’s total de-
mand in 2015. Meanwhile, Indonesia was on the second position by amounting
to 2.63 million tons (28%) of the world’s total demand for rubber commodity.
Other exporter countries such as Vietnam, Malaysia and Cote d’ivory success-
fully maintained their shares in this rubber global market around 9%, 8% and
4%, respectively.

5.1.5 Ports of Export

In this case, the type of port for rubber is container terminal and public port.
According to Indonesian Rubber Association (2014), Indonesia’s largest rubber
processing is in Sumatra and Kalimantan. Therefore, these islands have been
becoming the largest location for rubber exports. The number of volume export
of rubber was 2,570 thousand tons in 2014. There are five ports of export such
as Port of Boom Baru, Port of Belawan, Port of Teluk Bayur, Port of Jambi and
Port of Pontianak.

Table 5.3: Port of Export for Indonesia’s Rubber by Volume

Name of Port Province Volume %
(thousand ton)
Boom Baru/Musi River South Sumatra 1,041 41%
Belawan North Sumatra 626 24%
Teluk Bayur West Sumatra 238 9%
Jambi Jambi 231 9%
Pontianak West Kalimantan 192 7%
Others 243 9%
TOTAL 2,570 100%
Source: Modified from Indonesian Rubber Association (2014)

5.1.6 Main Importing Countries

Approximately 84% of Indonesia’s rubber production is exported. Almost one

fourth of export is shipped to United State of America (USA) followed by Japan
and China. In detail, the USA imported approximately 625 thousand tons or
24% of total volume exported. This rubber consumption is mostly absorbed
by manufacturing industries (in particular the automotive sector) in the USA.
Meanwhile, Japan accounted for nearly 425 thousand tons or 16% of the total
volume. The third position was China with 290 thousand tons or 11% of total
volume. Meanwhile, India and South Korea accounted for 290 thousand tons
(8%) and 183 thousand tons (7%), respectively. The other countries, which

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5 Rubber

dominated by Canada, Brazil, Germany Turkey and Singapore, were 903 thou-
sand tons or 34% in total. The proportion of these importing countries can be
seen as follows:

Table 5.4: Top Five Importing Countries of Indonesian Rubber by Volume

Importing Volume
%
Country (thousand tons)
USA 625 24%
Japan 425 16%
China 290 11%
India 205 8%
South Korea 183 7%
Others 903 34%
TOTAL 2,630 100%
Source: Modified from Indonesian Rubber Association (2015)

5.1.7 Existing Terms of Delivery

Most of Indonesian rubber exporters still use the Free On Board (FOB) system
for transporting rubber overseas, yet there is one difference for the definition
between FOB in Incoterms and FOB that is used among Indonesian exporters.
They called this term as “Traditional FOB” to distinguish this term with FOB in
Incoterms. Traditional FOB is similar to Free Alongside Ship (FAS) in Incoterms,
where the seller delivers the goods alongside the vessel (e.g. on a quay for con-
tainer) nominated by the buyer, not on board. This also emphasizes that buyer
bears all the costs from that moment onwards, including terminal handling
charges.
Manufacturer, seller and buyer of rubber in ASEAN countries make an agree-
ment to use FOB in Incoterms as their commercial terms, but still the responsi-
bility of the seller are not including terminal handling charges but it is included
on buyer’s account. Moreover, Indonesian rubber exporters and manufacturers
have a strong bargaining position to determine the terms than the buyer. This
occurs because Indonesia has a strong position as the second largest exporter
of rubber and the alliances between ASEAN countries, largest rubber exporters
in the world, agreed to apply the same commercial terms for rubber. While the
buyers commonly from tire industries and large-scale companies that dominate
the rubber market.

5.1.8 Rubber Benchmark

The figure illustrates the rubber price during January until September 2016.
Overall, the rubber price (especially TSR 20) is below the crude oil price. This

78
 5.2 Shipping Market

low price is because the rubber production growth is greater than the con-
sumption growth. The intended production growth is the large number of new
rubber production in Thailand, Vietnam, Cambodia, Laos and Myanmar as well
as several countries in Africa. Meanwhile, the consumption growth is weak be-
cause of several reasons. First, the slow pace of economic recovery in Unites
States and Europe. Second, the growth of consumption in China also depends
on its export market, which experienced a decline, as a result the demand of
rubber from China decreased. Third, the growth of world GDP is correlated
with the low growth in automotive which finally brought an impact on the nat-
ural rubber and tire needs.

Sources: Singapore SICOM Rubber Price (2016)

Figure 5.5: TSR 20 and RSS3 Price Vs. Crude Oil Price

5.2 Shipping Market

5.2.1 Ship Type

On the basis of products, liner shipping is the service of transporting rubber by

means of high-capacity, ocean-going ships that transit regular routes on fixed
schedules. Liner vessels, primarily in the form of container ships have become
the preferred transportation mode for many shippers in markets including USA,
China and Japan, which imports more than 1,300 thousand tons or one half of
total volume of Indonesian rubber. For most importer countries, containers
provide flexibility, reduced damage, and low rates for rubber shipments.
In terms of number of ships used, overcapacity of global container ship con-
tinues to claim casualties and force industry consolidation; shipowners are
scrapping younger and younger vessels. For instance, Diana Containerships

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5 Rubber

Sources: BIMCO, Clarksons

Figure 5.6: Container Ship Demolition Activity

announced that it was scrapping a 10-year-old vessel, one of the youngest ever.
Moreover, Peter Sand, BIMCO’s Chief shipping analyst, said that it is important
that the demolition of excess capacity comes sooner rather than later, as there
is still a huge delivery schedule hanging over the container shipping industry
for the rest of this year and well into 2017-2018. Figure 5.6 illustrates the de-
molition of container ship in the last two years. The demolition of Panamax
containerships in TEU accounts for 47 % of the total demolition in 2016, while
TEU scrapped from Intermediate and feeder containerships account for 30%
and 23% respectively.

Sources: BIMCO, Clarksons

Figure 5.7: Container Supply Growth

With regards to a new contracting activity, no orders have been agreed in 2016.

80
 5.2 Shipping Market

This is the first time since Q2-2009 that three months have passed without any
new orders signed. The lack of orders reflects the very poor market conditions.
In 2016, the average containership size for delivered ships is going down from
the all-time-high of 7,952 TEU in 2015 to around 7,000 TEU per ship.

5.2.2 Indonesian Fleet Availability

One of the objectives of this study is to evaluate the availability of Indonesian

fleet to potentially offer the service to replace foreign-flag vessels. Therefore,
we present the availability of Indonesian fleet for container ship.
According to Indonesia Port Corporation (IPC) Report, there are 212 container
vessels with a total nominal capacity of 110,220 TEU. The most common vessel
size is within the range of 350 to 500 TEU, this range accounted for more than
37% of total number of vessel deployed.

Source: Modified from IPC Report (2012)

Figure 5.8: National Container Fleet by Size (TEU)

It is interesting to note that the majority of national container fleet has a car-
rying capacity less than 1,000 TEU on a number of their services and it can be
categorized as small container ship. These small vessels commonly serve do-
mestic or inter-island shipment. This condition indicates that national vessels
still focus on domestic purposes and Indonesia is still lack of container vessels
with larger capacity for transporting export cargoes.

5.2.3 Shipments of Indonesian Rubber

Rubber transportation is commonly carried out as containerized products with

direct shipment or transshipment point. Direct shipment occurs when a vessel
carries the cargo on one shipping service from port of origin directly to port

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5 Rubber

of destination. Meanwhile, transshipment takes place when a cargo, which is

transported by a vessel, stops to an intermediate port to be moved in another
vessel. For instance, Figure 5.9 shows Indonesia’s largest container port at Tan-
jung Priok, which handle 70% of Indonesia’s total import and export flow and
is expected to exceed its capacity of 5 million TEU in 2012. Moreover, this port
also represents the shipment of rubber products because rubber’s manufacturers
are mostly located in West Indonesia. The common intermediate port or trans-
shipment points to deliver Indonesian rubber are generally in Singapore and
Malaysia. This transshipment point is usually use for delivering containerized
rubber products with long haul such as shipment to the USA, which typically
use a larger vessel or mother vessel. Furthermore, the figure also shows sev-
eral direct shipments to Asian continent and Australia. It should be noted that
foreign vessels still serve almost all this export shipments, which can be seen at
the figure below:

Modified: Central Bureau of Statistics of Indonesia (2012)

Figure 5.9: Direct and Transshipment Shipment of Container

Figure 5.10 shows the five biggest flag states of container for Indonesian export
in sequence are Panama, Singapore, Liberia, Hong kong and Marshall Island.
The proportion of container used for Indonesian export based on the flag states
were dominated by Panama and Singapore flag states, which accounted for 24%
(488 shipments) and 21% (441 shipments), respectively. Followed by Liberia
flag state with 18% or 73 shipments, Hong kong with 10% or 97 shipments and
Marshall Island with 7% or 151 shipments. While other flag states commonly
are Thailand, South Korea, Antigua and Cyprus. From the big five flag states,
there are three countries that implement Flag Of Convenience (FOC), such as

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 5.3 Evaluation of Shifting ToD

Panama, Liberia and Marshal Island with the total proportion of 49% of total
ships used.

Sources: Central Bureau of Statistics of Indonesia (2012)

Figure 5.10: The Five Biggest Flag States for Indonesian Container Export

5.3 Evaluation of Shifting ToD

As already stated in Section 5.1, Rubber is always shipped in container, there-
fore, evaluation of shifting ToD is conducted by applying common characteris-
tics of container shipping.
In order to evaluate the shift of ToD from “Traditional FOB” terms to CIF for
rubber commodity, firstly we should consider several conditions:
1. The common type of vessel to shipment of rubber is container ship and
the average volume of rubber is 30-40 TEU per shipment. This indicates
that the rubber shipment will never reach full container load, even for the
smallest size of container ship (200 TEU). Therefore, cargo consolidation
with other commodities is needed to make one shipment. However, this
calculation does not count for other commodities, because it is out of the
scope of work.
2. From a market structure point of view, it is argued that container mar-
ket is approaching perfect competition markets, where the price (freight
rates) is very sensitive and difficult to control (definitely depends on the
market).
Because of these reasons, the evaluation is conducted with the help of the
freight index, published freight rates and freight calculator that already exist
from valid and trusted sources. First, we need to verify that the published
freight rates and freight from the freight calculator is similar and represent the
container freight market condition.

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5 Rubber

Verification of Freight

1. Freight Index
The demand for container shipping is really not going anywhere at the
moment. Indicators for growth in the first months of 2016 point to limited
overall demand and huge variations from trade to trade. Volumes going
into Europe from Asia dropped 6.8% in January until February 2016 from
the year before, according to Container Trade Statistics (CTS). It is not
merely the volumes via transshipment that used to go into Russia, which
caused the volumes to drop. Mainland Europe demand continues to be
weak in itself. In 2015, volumes transported from Asia to Europe dropped
by 3.6%. Out of that, volumes going specifically to Russia dropped by
24.2%.
Head haul TEU-miles globally were down 1.2% in January until February
2016 (as measured by Sea Intel) compared to the year before. A similar
negative development was seen in 2013, whereas 2014 and 2015 saw
sailing distances grow faster than underlying TEU demand.

Source: Shanghai Shipping Exchange

Figure 5.11: Shanghai Containerized Freight Index

This drop in demand for container shipping was also reflected in freight
rates on all the container routes out of Shanghai covered by the Shanghai
Shipping Exchange. Nearly all of the head haul freight rates sit at their
lowest levels on record by mid-April. Both trades going to US east coast
and west coast are 50% below a six-year average for April. For Shanghai
to Europe it is slightly worse. The exceptions are to destinations in East
Japan and Santos, where rates are above the 2015-level but still below
the six-year average.
2. Published Freight
Inline with the container freight index, liner shipping has had a torrid
time so far in 2016 with the freight rate volatility reaching unprecedented
levels. Meantime, main importing countries of rubber are USA, Japan,
China, India and South Korea. On those five routes, there is one route that

84
 5.3 Evaluation of Shifting ToD

represents the export rubber products to Japan as the second biggest im-
porter. These actual rates generally remain in the range of US$300-600/
TEU, but now it is reached the bottom line of the freight at approximately
US$310/ TEU. This indicates that the real freight rate is probably way to
represent the actual freight rates. In conclusion, the volatility in freight
rates remains a very high as long as over-capacity and carrier industry are
instability continually.
3. Freight Calculator
Freight calculator is an online tool for calculation distances and shipping
rates between sea ports. The distance depends on the length between
origin and destination port. The assumption of origin port is Port of Tan-
jung Priok, Jakarta, Indonesia; whereas the destination port depends on
every importing country. The destination port is assumed by the high-
est shipment of container. Figure (5.5)shows freight rates of five biggest
importing countries of rubber.

Table 5.5: Container Freight Rates from Indonesia to Main Importing Countries

Distance Freight Freight

Origin Destination
(Nm) ($/TEU) ($/TEU.Nm)
Los Angeles,
7,899 1,700 0.22
USA
Tj. Priok Tokyo, Japan 3,234 320 0.10
Indonesia Huangpu, China 1,859 299 0.16
Mumbai, India 2,708 542 0.20
Busan, South
2,839 247 0.09
Korea
Modified: World Freight Calculator (November 2016)

From information from freight index and published freight, these sources
indicate that container freight is in the bottom line. As mentioned in pub-
lished freight, the freight rate from Indonesia to Japan is US$310 /TEU
and freight rate from freight calculator is US$320/ TEU. The error of cal-
culated freight with the published freight is only 3%. Since this error is
relatively small, we are confident to use this freight calculator in this study
to calculate the potential freight.

Potential Freight for Indonesian Shipping Services

Potential freight means estimated freight for Indonesian shipping services from
export transaction regardless the terms of delivery that is used (either with FOB
or CIF terms). This section provides estimated freight of rubber export shipment
from the five biggest importing countries, which is USA, Japan, China, India and
South Korea.

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5 Rubber

To define the potential freight for each importing country, we assume that the
verified freight calculator above could represent the actual potential container
freight. Meanwhile, the freight is based on full container load (FCL) shipment
with dry container in TEU (consist of 20 ton rubber/TEU). Therefore, the result
of potential freight is as follows:

Table 5.6: Potential Freight for Rubber

Importing
No. Volume Export Freight
Country
(ton/year) (US$/year)
1 USA 624,700 53,099,500
2 Japan 425,000 6,800,000
3 China 289,500 4,328,025
4 India 204,500 5,541,950
5 South Korea 182,800 2,257,580
Total 1,726,500 72,027,055

Table (5.6)shows estimated freight for rubber commodity. This means that
Indonesian shipping service has a potential freight around US$72,027,055 in
2015. This potential freight presents about 66% of the total volume of rubber
export (2,629,900 ton) and represents around 2% of the total FOB value, which
consists of rubber price, freight and insurance.
This potential freight for rubber proves that Indonesian shipping service has an
opportunity to serve this export shipment, where currently foreign vessels are
serving those countries. Nevertheless, shifting the ToD from FOB to CIF should
firstly look at the condition of national container fleet from quantity, quality,
compatibility and reliability. From this analysis, national shipping companies
must have at least 86,325 TEU of dry containers to serve rubber export ship-
ments to the five biggest importing countries.
According to Indonesia Balance of Payment (2016), Indonesia was facing a
total deficit of US$ 8.29 billion in 2015 and almost 74% deficit came from
transportation service. Overall, this potential freight for rubber export has a
potential to reduce the total deficit around 0.87%.

Response of CIF Implementation

Based on interviews and observations, Gapkindo (Indonesian Rubber Associa-

tion), on behalf of the exporters or sellers, reveal that the shift of FOB to CIF
is suitable for certain commodity where its market segments is a seller’s market
and not buyer’s market. Since the early 1970s, the majority of rubber exports
has been using FOB term. In other words, a CIF term is not really suitable to be
applied for the rubber commodity because Indonesian rubber market (includ-
ing Thailand and Malaysia) is a buyer’s market, which has a less bargaining
position.

86
 5.3 Evaluation of Shifting ToD

Furthermore, FOB is more efficient for exporters as a seller because of several

reasons. Firstly, when the goods are already on the vessel (on board), the seller
can immediately receive the Bill of Lading (B/L) and ask for payment to the
buyer. Secondly, the buyers appoint the vessel; this means that if there is a
delay in the arrival of the vessel then the risks are borne by the buyer itself.
Thirdly, the exporter’s responsibility of the goods is until the CFS (Container
Freight Station) or warehouse in the port of origin, which is appointed by a
shipping party.
The Indonesian rubber exporters emphasize the transition from FOB to CIF is
including the transfer of its responsibilities that could incriminate the exporters
because they are automatically responsible for the goods shipped till the des-
tination country. This transition also brings more risk to the exporter. For in-
stance, if they made some mistakes when choosing the vessel then the security
and safety of the goods are threatened. In addition, there is also an immense
concern about inadequate national fleet that resulting in frequent delays.
The exporters have argued that CIF term will weaken the competitiveness of
Indonesia’s rubber in the international market:
• Bargaining position of ocean freight from sellers is very weak (higher
freight) and as a consequence it will be hard to compete in the global
freight market. In terms of the ocean freight, buyers have a great bar-
gaining position due to the large volume of rubber to be transported per
shipment, so that the shipping company could provide a cheaper freight
in contract of carriage because they shipped a large volume. Moreover,
there are typical buyers who have purchased the representative office in
Singapore to buy rubber from ASEAN countries.
• When the seller offers the higher freight, it will automatically increase the
price of goods offered to the buyers. In this case, the buyer can certainly
shift their purchases to other countries such as Thailand, Malaysia, Viet-
nam and Cambodia; where there is no government regulation about the
use of CIF in those countries. In addition, big companies or buyers also
supported with representative office to facilitate their purchasing activi-
ties in Singapore.
• Because the insured volume by the seller is much smaller than the insured
volume by the buyer, so that the seller will bear the higher cost of insur-
ance. The consequence of this expensive cost of insurance will weaken
the competitiveness.
• Under a CIF term, the most disadvantages situation for sellers is a cash
flow disruption and delay since the buyer will make payments when the
goods have arrived at the port of destination; where the three biggest
buyers are China, America, and Japan.
In spite of that Gapkindo stated that Indonesian government should solve those
problems before shifting the Incoterms from FOB to CIF with these following
approaches:

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5 Rubber

• Empower the National fleets to allocate the container vessels for export
shipment.
• Provide an incentive to shipping companies to prepare the vessel for in-
ternational shipment, such as completing or updating the classification
requirements.
• Regarding the cash flow issues, government should have a solution to
cover the interest rate of Indonesian bank until it can produce a compet-
itive rate with other interest rates in importing country. This action will
encourage the seller to apply a CIF term because they can bear the cost
of money for 30-50 working days (depends on the destination port) until
the buyer makes the payment of the goods.

5.4 Summary
1. Indonesian rubber is commonly exported by “Traditional FOB” system,
which is different from FOB in Incoterms. Traditional FOB is similar
with Free Alongside Ship (FAS) in Incoterms, where the seller delivers
the goods alongside the vessel (e.g. on a quay for container) nominated
by the buyer, not on board. In addition, other biggest rubber exporter
such as Thailand and Malaysia also apply FOB term instead of CIF term.
Hence, it indicates a difficulty to shift the existing term into CIF especially
for rubber commodity.
2. In terms of value and volume, Indonesia is the second world’s largest
exporter for natural rubber after Thailand. Based on the data, majority of
exporting countries are using FOB term and the shift ToD into CIF term in
Indonesia will be implemented only if the big players apply the CIF term
as their primary ToD for international trade of rubber.
Moreover, the main importing countries of Indonesian rubber are USA,
Japan, China, India and South Korea. The type of rubber exported to these
countries is TSR-20, which usually used as a core material for producing
a tire.
3. The type of ships commonly used to transport rubber is container ship
and the average size of ship required is 7,000 TEU. On the basis of prod-
ucts, liner shipping is the service of transporting rubber by means of high-
capacity, ocean-going ships that transit regular routes on fixed schedules.
The findings depict that major Indonesian rubber products are delivered
with direct shipment or transshipment. Ocean-going container vessels
with foreign-flag serves both of the shipments. Yet there is no direct ship-
ment by using Indonesian-flag vessels to serve the Indonesian rubber ex-
port to the main importing countries.
4. Potential freight of Indonesian container shipping to export Rubber is
around US$ 72.1 million in 2015. This potential freight presents about

88
 5.4 Summary

66% of the total volume of rubber export (2.63 million tons) and repre-
sents around 2% of the total FOB value. Moreover, this potential freight
also has a potential to reduce the total deficit around 0.87%.
5. Response of CIF implementation:
a) Shifting ToD from FOB to CIF will affect on the higher freight. Thus,
it has consequences not only on the international market but also on
the rubber farmer. By charging the higher freight, it will make the
rubber market more competitive especially among neighbor coun-
tries. If Indonesia could not compete then it would be threat the
rubber industries, included the farmers.
b) Regarding the cash flow issue, if the shifting ToD into CIF is imple-
mented, meaning that the seller should cover all of costs incurred
during exporting the rubber. Almost rubber sellers have a big prob-
lem to manage their cash flow. That is why they prefer to use FOB
rather than CIF, because they do not have to handle the transporta-
tion cost for exporting the rubber.
c) Indonesia has around 28% of global market share, which is very
weak of bargaining position on the global rubber market. It indi-
cates that either rubber industries or rubber sellers are not ready to
face the shifting ToD into CIF. If it is imposed on them, it will make
they leave this business immediately.

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6 Shrimp

T
his chapter deals with the evaluation of shifting ToD from FOB term to
CIF term especially for Shrimp. As we did in Chapter 5, this chapter
firstly introduces an overview of shrimp industry in Indonesia, followed
by current market condition of Shrimp. Analysis of the current market condition
will be conducted not only from supply side, but also from demand side. Ana-
lyzing from supply side will include production capacity and the importance of
shrimp in term of export on the overall Indonesian export basket. Meanwhile,
from the demand side, the global market share of Indonesian shrimp will be
elaborated as well as the main importing countries.
In the second section, we discuss the shipping market condition of shrimp trans-
port both for Indonesian and global market. The common types and sizes of
ship used in transporting shrimp will also be presented.
In the third section, we present the evaluation of shifting ToD of shrimp from
FOB term to CIF term. The evaluation is conducted by comparing the existing
ToD of shrimp in FOB term with the calculated CIF term.
This chapter ends with concluding remarks containing a summary of the previ-
ous sections.

6.1 Commodity Market

6.1.1 Shrimp Industry in Indonesia

Indonesia is the world’s second largest seafood producer and a major player in
the shrimp sub-sector, with around 1.7 billion US$ in annual shrimp exports
in 2014. The country’s 34 provinces encompass thousands of islands home to
artisanal and industrial fisheries, as well as small and large scale aquaculture
operations. There is two shrimp species dominate shrimp farming in Indonesia:
the giant tiger prawn (P. monodon) and white-leg shrimp (L. vannamei).

Figure 6.1: Shrimp Supply Chain

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6 Shrimp

Regarding to shrimp supply chain, there have been a few value chain studies on
Indonesian shrimp (NACA, 2006; IFC, 2006; Development Alternatives, 2006;
Oktaviani et al. 2007). Overall, the supply chain begins with the fry (shrimp
larvae) then supplied upstream to the aquaculture operators was collected from
open coastal waters or from ponds. Families or small businesses operate the
majority of aquaculture ponds on relatively small land areas and only a few
big companies operating in this node of the supply chain. Once the shrimp has
fully matures in the aquaculture ponds, they are harvested and sold through
local trade for further processing.
In local trade, farmers are connected to processors either directly through auc-
tions or sometimes through traders. Some farmers supply shrimp directly to
processors and exporting companies, wholesalers and retails outlets. The bulk
of globally traded shrimp is exported in whole or with minor processing. How-
ever, as consumer demand has evolved in the main markets, consumers con-
duct i.e. the USA and Japan, more and more processing prior to exporting to
allow easy use of the frozen goods. This further processing refers to peeling
and deheading and cutting. Then the shrimp is frozen and shipped to export
market[17].

6.1.2 Production of Shrimp

A particular hub for shrimp aquaculture stretches from the southern tip of
Sumatra Island through Java Island to the Lesser Sunda Islands—this arc con-
tains the four highest producing white-leg shrimp aquaculture provinces of West
Java, Lampung, East Java, and West Nusa Tenggara. Meanwhile, East Kali-
mantan, North Kalimantan, South Kalimantan, South Sulawesi and East Java
harvested giant tiger shrimps.

Figure 6.2: Indonesian Aquaculture and Wild Shrimp Resources

In the period of 2010-2014, total aquaculture production increased from 380,972
tons in 2010 to 638,955 ton, valued at 1.4 billion US$ in 2013[5], with an av-
erage growth of 13% per year. This growth was the result of innovations in

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 6.1 Commodity Market

technology, expansion of aquaculture area and availability of suitable quality

fish seeds. The graph below shows total aquaculture production in Indonesia
according to Directorate General of Aquaculture Fisheries data:

Sources: Directorate General of Aquaculture Fisheries (2014) [5]

Figure 6.3: Indonesian Shrimp Production, Export and Domestic Consumption

(White-leg Shrimp and Giant Tiger Shrimp)

At the beginning of the period, the volume of export lower than for domes-
tics consumption, standing at 145 thousand tons compared to 236 thousand
tons for domestic consumption. From 2010 to 2012, both export and domestic
consumption increased steadily. Over the next two years, the volume of ex-
port decreased quite considerable, dropped around 21 thousand tons by 2015.
Meanwhile, domestic’s volume far exceeded that of export, reaching at a mas-
sive 451 thousand tons in 2015.

6.1.3 Indonesian Shrimp Export

Source: Modified from Central Bureau of Statistics of Indonesia (2015)

Figure 6.4: Indonesian Export Commodities by Sectors (value in billion $)

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6 Shrimp

In 2015, Indonesia’s farmed shrimp represented the single greatest contributor

to Indonesia’s agriculture export earnings with about US$1.71 billion or 29%
from the agricultural export products. From the five-farmed shrimp varieties
in Indonesia, white-leg and giant tiger shrimps are the two primary species
grown for the export market [10]. Meanwhile, the second largest export from
agricultural products is coffee, followed by fishes and spices.

On the other hand, the volume of Indonesian shrimp exports has held fairly
steady over the past decade, with a peak of 140,800 ton exported in 2008,
which is not much higher than the figure for the most recent year of available
data (forecasting result in 2015: 141,546 ton exported). The total volume of
shrimp exported in 2015 was very small below than one percent of the total
export basket of Indonesia.

6.1.4 Global Market Share

Shrimp production grew steadily in Asia through 2011, an average of 7% an-

nual growth rate from 2006 to 2011 (Figure 6.5). Production in 2012 declined
to 3.4 million ton (down 5% from 2011) due to the impacts of early mortality
syndrome (EMS) or acute hepatopancreatic necrosis syndrome in China, Thai-
land, Vietnam and Malaysia. According to the survey respondents, production
in Asia fell 21% in 2013 to around 2.7 million ton, with the most substan-
tial declined taking place in China and Thailand [2]. Although production in
China was expected to recover in 2014 from 1.1 to 1.2 million ton, output in
Thailand was expected to decline even further to 200,000 million ton, with an
eventual partial recovery in 2015. Productions in Vietnam, Indonesia and India
are expected to increase steadily between 2013 and 2016, with Vietnam and
India are achieving double-digit growth rates. In 2016, Vietnam, Indonesia,
India and Bangladesh are expected to reach production of 590,000; 450,000;
395,000 and 107,000 ton, respectively. Thailand could drop from second to
fifth place in the region, by producing 328,000 million ton in 2016. Output
in China is expected to reach 1.3 million ton in 2016, 16% below the record
quantities achieved in 2011. These forecasts assume that impacts from diseases
are reduced to manageable levels.

Despite global uncertainties and sluggish global growth, Susi Pudjiastuti, In-
donesia’s Minister of Maritime Affairs, is optimistic about growth of Indonesia’s
fishery sector in 2016 as the central government has earmarked IDR 13.8 tril-
lion in the 2016 State Budget for the Maritime Affairs Ministry, up to 31.4%
from the allocation in the 2015 State Budget. Pudjiastuti said the country’s
fishermen will be prioritized when spending these funds [6]. Moreover, exports
of shrimp and other fishery products are also estimated to rise due to the start
of the ASEAN Economic Community (AEC) in 2016.

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 6.1 Commodity Market

Sources: FAO (2009-2012) and GOAL survey (2013-2016).

Figure 6.5: Global Market Share of Shrimp Aquaculture in Major Farming Na-
tions in Asia[10]

6.1.5 Ports of Export

Based on Directorate General of Aquaculture Fisheries, every species has its
specific place for production. West Java is the biggest export of giant tiger
shrimp by 28% of the total export. Followed by South Sulawesi by 13% of the
total export. The other provinces were much smaller. Central Sulawesi, East
Java and East Kalimantan brought in 9% each of overall shrimp production.
Moving on to white-leg shrimp, Lampung and West Nusa Tenggara produced
similar amount of white-leg by 19.5% and total counted around 38% of total
production for both provinces. East Java contributions, which were the third
largest production source, brought by 13% of overall production. This was
followed by South Sumatra and West Java around 20% in total. Other provinces
such as Central Java, West Kalimantan, South Kalimantan, North Kalimantan,
Gorontalo and Maluku making up the remaining of 39% combined.

Table 6.1: Port of Export for Indonesia’s Giant Tiger Shrimp by Volume
Name of Port Province Volume %
(thousand ton)
Tanjung Priok West Java 34.5 28.1%
Soekarno-Hatta South Sulawesi 16.0 13.1%
Pantoloan Central Sulawesi 11.8 9.7%
Tanjung Perak East Java 11.0 9.0%
Samarinda East Kalimantan 10.8 8.9%
Others 38.4 31.3%
TOTAL 121.7 100%
Source: Modified from Directorate General of Aquaculture Fisheries (2014)

Although these provinces have a great potential to produce shrimp, not all
shrimp for exports from its province port because the shrimp needs further

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6 Shrimp

Table 6.2: Port of Export for Indonesia’s White-leg Shrimp by Volume

Name of Port Province Volume %
(thousand ton)
Panjang Lampung 78.9 19.5%
Lembar West Nusa Tenggara 76.8 19.0%
Tanjung Perak East Java 52.9 13.1%
Tanjung Api-api South Sumatra 39.7 9.8%
Tanjung Priok West Java 39.4 9.7%
Others 115.5 28.6%
TOTAL 403.4 100%
Source: Modified from Directorate General of Aquaculture Fisheries (2014)

processing in other areas and then shipped to main container port in Indone-
sia. Most export products pass through the two main ports which are Tanjung
Priok (Jakarta) and Tanjung Perak (Surabaya). Meanwhile, shrimp products in
Sumatra Region sometimes directly go to Port of Belawan and shrimp products
in Sulawesi Region often go to Port of Makassar.

6.1.6 Main Importing Countries

Table 6.3 shows the main export destination countries for Indonesian shrimp
such as USA, Japan, China, Malaysia and Singapore. In Indonesia, farmed
shrimp represents the single greatest contributor to Indonesia’s aquaculture ex-
port earnings (29%). From the five farmed shrimp varieties in Indonesia, giant
tiger and white-leg in particular are the two primary species grown for the ex-
port market.

Table 6.3: Top Five Importing Countries of Indonesian Shrimp by Volume

Importing Volume
%
Country (thousand tons)
USA 85.8 58%
Japan 27.5 19%
China 5.5 4%
Malaysia 4.0 3%
Singapore 3.4 2%
Others 22.0 15%
TOTAL 148.5 100%
Source: Modified from Central Bureau of Statistics of Republic Indonesia (2015)

Overall, the most significant importing countries of shrimp were USA and Japan,
which together accounted for almost 75% of the total shrimp export proportion.
In the meantime, China, Malaysia and Singapore and other countries were only
took a few proportion over this year.

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 6.1 Commodity Market

6.1.7 Existing Terms of Delivery

Sources: Indonesian Fishery Product, Processing and Marketing Association (2016) [15]

Figure 6.6: The Proportion of Existing Terms of Delivery

Shrimp exporters prefer to select ocean vessel as a mode of transport, as it is

one of the cheapest and most convenient ways to ship shrimp overseas. Dif-
ferent from previous study for crude palm oil and coal commodities, the com-
mon Terms of Delivery used by Indonesian shrimp exporters is CFR (Cost and
Freight). Shrimp sellers arrange and absorb the cost of shipping their cargo to
the port of destination using CFR terms for about 97% of total export shipment.
There are several example of company, which use this CFR terms, such as PT.
Wirontono Baru, PT. Winaros Kawula Bahari, PT. Madsumaya Indo Seafood,
PT. Bumi Menara Internusa, PT. Kalimantan Fishery, PT. Suri Tani Pemuka, PT.
Alter Trade Indonesia and PT. Istana Cipta Sembada [15].
On the other hand, Indonesian Fishery Product, Processing and Marketing As-
sociation (AP5I) emphasizes that the seller was confused when stated the ToD
in Export Declaration (Pemberitahuan Ekspor Barang/ PEB). They only write the
FOB price because there is no column to state the freight in the Export Decla-
ration paper when they use CFR or CIF terms. This misunderstanding made
Directorate General of Customs and Excise did a wrong record about the terms
that is used in the real transaction. Budhi Wibowo, AP5I Chairman, suggest the
government to modify the Export Declaration in order to discover the freight
and prevent misunderstanding in the government’s record.
Figure 6.6 shows a common term used by the seller is CFR and only around
3% utilizing FOB terms of the total terms. There are several reasons why the
minority sellers still apply FOB term instead of CFR term:
• Seller are dominantly new exporters who are less experience on interna-
tional trading. They do not really understand about the use of Incoterms,
so that they choose to avoid the risk of ocean freight.
• Buyers are companies that have a special freight rate (lower than the
freight market), therefore they have a power to manage the export ship-
ment by themselves.

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6 Shrimp

• Buyers generally have a branch office (representative office) in Indonesia,

thus there is no difficulty in taking care of their shrimp export activities.

6.2 Shipping Market

6.2.1 Ship Type

On the basis of products, shrimp product is transported with liner service be-
cause the shipment is in a small amount and fixed schedules. A type of ship
typically used to transport perishable commodities is container ship with a
temperature-controlled system.
According to AP5I, Indonesian shrimp product is transported in reefer contain-
ers and almost 90% of shrimp is processed into frozen fishery products. Every
year, as a part of fisheries products, shrimp contributes a high proportion of
these frozen products to enter international trade through sea transport.
In Indonesia, big companies export approximately 10 - 20 container boxes per
month, while smallholders or farmers are supplying their shrimp to these big
companies. Before the shrimp is transported overseas, firstly it should have a
right packaging method according to buyer’s provision. There are two common
methods to ship the shrimp as packaged frozen products; they are block frozen
and Individual Quick Frozen (IQF). Block frozen means the shrimp are placed
on plate freezer frames (metal frames), water is poured in and the shrimp are
frozen in blocks. However, as every 2 kg of the block-frozen products require
1 kg of water, nearly 34% of the weight of the product is due to the water.
While the packaging for the block frozen product consists of master carton and
inner carton. Inner carton of appropriate size for packing 2 kg of shrimp and
six inner cartons shall be placed in one master carton. Inner cartons must
be free of damage, sealed at all edges and free of all extraneous matter and
odors. Master carton shall be durable in strength in order to withstand normal
handling during shipment.
Meanwhile, IQF means the shrimp were not frozen in a big block of ice and are
more likely to have better flavor and texture, and the shrimp has been peeled
or cleaned. IQF method requires about 0.05 kg of water per 1 kg of product.
IQF product is a conveniently packaged with 1-2 kg per packaged. Similar to
block frozen product, every 10 packaged (10-20kg) of this frozen product shall
be placed in one master carton and each master must be plainly marked by its
manufacturer’s name and detail of the shrimp product.
After packaging process is done, shrimp can be transported both with FCL (Full
Container Load) or LCL (Less Container Load) shipment; it is totally depended
on the volume to be shipped by the seller. Normally big companies use FCL
because they have sufficient product to fit with its container volume, while LCL
enables smaller sellers, such as small and medium enterprises, to ship smaller

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 6.2 Shipping Market

amounts of product that is not of a large enough volume to make FCL a viable
option.

6.2.2 Indonesian Fleet Availability

One of the objectives of this study is to evaluate the availability of Indonesian

fleet to potentially offer the service to replace foreign-flag ships. As we know
that shrimp product is delivered with reefer container, so that the ship type is
container ship but with special space to carry a reefer container. As described
in Section 5.2.2, national container ships mostly have small size and transport
cargoes for domestic purposes rather than for international shipments. This
condition specified that there is limited national reefer container and insuffi-
cient size of ship in order to carry reefer products.

6.2.3 Shipments of Indonesian Shrimp

Modified: Central Bureau of Statistics of Indonesia (2012)

Figure 6.7: Direct and Transshipment Shipment of Container (Origin: Tanjung

Perak)

Shrimp product is exported by container vessels, thus it has similar shipment

term with rubber commodity. This container vessel serves both direct and trans-
shipment shipments. This transshipment generally does to combine small ship-
ments from Indonesia into a large shipment (consolidation) with larger size of

99
6 Shrimp

container vessel. Figure 6.7 shows direct and transshipment shipments from
Port of Tanjung Perak, Surabaya, which is the biggest container port in Eastern
Indonesia. This shipment can be assumed to present the shipment of shrimp
products because most of shrimp companies and industries are in Eastern re-
gion of Indonesia. Overall, the major shipment to export shrimp product is
through transshipment point in Singapore and Malaysia. Meanwhile, other
destination countries such as China, South Korea and Philippines are identified
as direct shipments.
Currently, all container shipments are served by foreign container vessels. If
there is a direct shipment of shrimp commodity from Indonesia to main import-
ing countries, so that national fleet has an opportunity to serve this shipment
with similar route of export. Nevertheless, this national fleet should firstly meet
the international shipping standard such as statutory regulations and ship’s clas-
sification. Furthermore, the shrimp product is shipped with reefer container. In
addition, not all container vessels can transport container reefer because of
the limitation of vessel specification such as reefer plugin for electricity and its
power needs. Therefore, the number of container vessels that carried reefer
containers is less than the common container vessels.

6.3 Evaluation of Shifting ToD

As already stated in Section 6.1, shrimp is always shipped in reefer container,
therefore, evaluation of shifting ToD is conducted by applying common charac-
teristics of container shipping.
Similar to previous study case for Rubber commodity, in order to evaluate the
shift in ToD from CFR or FOB term to CIF term for shrimp commodity, firstly we
should consider several conditions:
1. The common type of vessel required to shipment the number of shrimp
export is container ship and the average volume of shrimp is 10-20 TEU
per shipment. This indicates that the shrimp shipment will never reach
full container load, even for the smallest size of container ship (e.g. 200
TEU). Therefore, cargo consolidation with other commodities is needed
to make one shipment. However, this calculation does not count for other
commodities, because it is out of the scope of work.
2. From a market structure point of view, it is argued that container mar-
ket is approaching perfect competition markets, where the price (freight
rates) is very sensitive and difficult to control (definitely depends on the
market).
Because of these reasons, the evaluation is conducted with the help of the
freight index, published freight rates and freight calculator that already exist
from valid and trusted sources. First, we need to verify that the published
freight rates and freight from freight calculator is similar and represent the
container freight market condition.

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 6.3 Evaluation of Shifting ToD

Verification of Freight

1. Freight Index
As mentioned in Freight Index section on page 84, demand for container
shipping is at the bottom at the moment and also affects the freight rates
all the container routes. Nearly all of the head haul freight rates sit at
their lowest levels on record in the second quarter 2016.
2. Published Freight
Main importing countries of shrimp are USA, Japan, China, Malaysia and
Singapore. On those five routes, there is one route that represents the
shrimp products to Japan as the second biggest importers. For instance,
the actual freight rates of reefer container from Tanjung Perak, Indonesia
to Tokyo, Japan is generally US$1,000-1,400/ TEU while current condi-
tion of freight rates to Japan is US$600-1,000/ TEU, which indicates a
bottoming freight almost 30% of actual freight rates.
3. Freight Calculator
Freight calculator is a online tool for calculation distances and shipping
rates between sea ports. The distance depends on the length between
origin and destination ports. The assumption of origin port is Port of Tan-
jung Perak, Surabaya, Indonesia; whereas the destination port depends
on every importing country. The destination port is assumed by the high-
est shipment of container. Figure (6.4)shows freight rates of five biggest
importing countries of shrimp.

Table 6.4: Reefer Container Freight Rates from Indonesia to Main Importing
Countries
Distance Freight Freight
Origin Destination
(Nm) ($/TEU) ($/TEU.Nm)
Los Angeles, USA 7,899 3,739 0.47
Tokyo, Japan 3,234 952 0.29
Tj. Perak
Huangpu, China 1,859 830 0.45
Indonesia
Tanjung Pelepas,
615 903 1.47
Malaysia
Singapore 520 860 1.65
Modified: World Freight Calculator (November 2016)

Based on the information from freight index and published freight, these
sources indicate that container freight is in the bottom line. As mentioned
in published freight, the freight rates from Indonesia to Japan are rang-
ing from US$600-1000 /TEU and freight rate from freight calculator is
US$952/ TEU. Since this calculated freight is between the current pub-
lished freight, we are confident to use this freight calculator in this study
to calculate the potential freight.

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6 Shrimp

Potential Freight for Indonesian Shipping Services

Potential freight means estimated freight for Indonesian shipping services from
export transaction regardless the terms of delivery that is used (either with FOB
or CIF terms). This section provides estimated freight of shrimp export ship-
ment from the five biggest importing countries, which are USA, Japan, China,
Malaysia and Singapore.
To define the potential freight for each importing country, we assume that the
verified freight calculator above could represents the actual potential container
freight. Meanwhile, the variety of frozen shrimp products is carried by sea in
reefer vessel and reefer container. These containers are mainly available as
20’ and 40’ containers, but the typical size for Indonesia’s shrimp export is 20’
reefer container (TEU) and shipped with FCL (full container load). Therefore,
the result of potential freight is as follows:

Table 6.5: Potential Freight for Shrimp

Importing Volume Export Freight
No.
Country (ton/year) (US$/year)
1 USA 85,839 16,047,601
2 Japan 27,598 1,313,665
3 China 5,531 229,537
4 Malaysia 4,071 183,806
5 Singapore 3,434 147,662
Total 126,473 17,922,270

Table (6.5)shows estimated freight for shrimp commodity. This means that
Indonesian shipping service has a potential freight around US$17,922,270 in
2015. This potential freight presents about 85% of the total volume of shrimp
export (148,519 ton) and represents around 1.1% of the total FOB value, which
consists of shrimp price, freight and insurance. The percentage of freight rates
is small because shrimp is categorized as a high-value commodity.
This potential freight for shrimp proves that Indonesian shipping service has
a little opportunity to serve this export shipment, although foreign vessels are
currently serving those importing countries. Nevertheless, shifting the ToD from
FOB to CIF should firstly look at the condition of national container fleets from
quantity, quality, compatibility and reliability. From this analysis, Indonesian
shipping company must have at least around 6,324 TEU reefer containers to
serve shrimp export shipments to the five biggest importing countries.
According to Indonesia Balance of Payment (2016), Indonesia was facing a
total deficit of US$ 8.29 billion in 2015 and almost 74% deficit came from
transportation service. Overall, this potential freight for shrimp has a potential
to reduce the total deficit around 0.22%.

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 6.4 Summary

Response of CIF Implementation

Based on the interviews conducted along with Indonesian Fishery Product, Pro-
cessing and Marketing Association (AP5I), they declared that the actual use
of Incoterms is a purely relationship between business-to-business (B2B). The
government is expected not to intervene the commercial transaction because it
will have an impact to weaken the competitiveness of Indonesia’s position in
the international market because the buyer can easily switch their purchasing
to other exporting countries.
On behalf of all Indonesia’s shrimp and other fishery products sellers, AP5I has
several suggestion to government before implementing the CIF term, they are:
• Take an action to improve Indonesia’s sea transportation because freight
for domestic shipment is more expensive than freight for international
shipment.
• Encourage and support small and medium shipping companies to operate
their vessels, thus not only several big companies dominate the domestic
shipping. Indeed, the number of commercial vessels have been increasing
due to Cabotage’s implementation, but still only big shipping companies
owned the majority of the vessels, which indicate oligopoly market.

6.4 Summary
1. The common ToD to export Indonesian shrimp is CFR (Cost and Freight).
In the most cases, shrimp sellers arrange and absorb the cost of shipping
from origin to destination port. On the other hand, the use of FOB terms
is very few compared to CFR term because of three main reasons:
a) Seller are dominantly new exporters who are less experience on in-
ternational trading. They do not really understand about the use of
Incoterms, so that they choose to avoid the risk of ocean freight.
b) Buyers are companies that have a special freight rate (lower than the
freight market), therefore they have a power to manage the export
shipment by themselves.
c) Buyers generally have a branch office (representative office) in In-
donesia, thus there is no difficulty in taking care of their shrimp ex-
port activities.
2. In terms of value and volume, Asia countries are the main exporting coun-
tries on global shrimp market. China is the world’s largest exporter of
shrimp, followed by Vietnam and Indonesia. In addition, the main im-
porting countries of Indonesian shrimp are USA, Japan, China, Malaysia
and Singapore.
It should be noted that China is found as the main exporter and importer

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6 Shrimp

simultaneously. It is caused by the total production for White-leg Shrimp

in China cannot meet with the higher number of domestic consumption,
whereas China’s shrimp export only for the reprocessed products.
3. The type of ships used to transport shrimp is container ship. However,
most of shrimp products are exported in a frozen, thus the type of con-
tainer used is a reefer container.
In addition, major Indonesian shrimp products are delivered with direct
shipment or transshipment. Both of them are served by ocean-going con-
tainer vessels with foreign-flag. Yet there is no direct shipment by using
Indonesian-flag vessels to serve the Indonesian rubber export to the main
importing countries.
4. Potential freight of Indonesian container shipping to export shrimp prod-
uct is around US$17.9 million in 2015. This potential freight presents
about 85% of the total volume of shrimp export (148,519 ton) and rep-
resents around 1.1% of the total FOB value. The percentage of freight
rates is small because shrimp is a high-value commodity. However, this
potential freight also has a potential to reduce the total deficit around
0.22%.
5. Response of CIF implementation:
a) Shifting ToD from FOB or CFR to CIF will have consequences not only
on the global market share but also on the fisherman. Because almost
the shrimp exporters are new players, so by charging the ToD, it
will make the shrimp market more competitive especially among Asia
countries. If Indonesia could not compete then it would be threat the
shrimp industries, included the fisherman.
b) Due to the usage of container vessels, meaning that transporting the
shrimp export can be served by direct shipment or transshipment. In
fact, almost shrimp export products are served by foreign-flag ves-
sels. Nonetheless, as long as there is a direct link from Indonesia to
several importing countries, then there is a potential for Indonesian-
flag vessels to serve the route only if these vessels can meet the in-
ternational regulation.
c) Shrimp industries or sellers are not ready to face the shifting ToD
into CIF, it will make they leave this business immediately because
of less bargaining position of Indonesia in the global shrimp market.

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7 The Impacts on Shifting the
Terms of Delivery
This chapter is added to elaborate the impacts, including pros and cons, due to
shifting the term for exporters, freight forwarders, insurance firms and shipping
lines. It is provided as a basic insight before formulating the recommendations.
As mentioned at the beginning of this report, this study is conducted based on
the assumption that changing the Term of Delivery (ToD) from FOB to CIF of
Indonesian export products will promote the Indonesian-flag vessels. Under
this assumption, the beneficiaries of this shifting are not only national shipping
operators but also locally established freight forwarders and insurance compa-
nies.
Nevertheless, based on the result of the calculation and interview with some
“actors”, there would be any Pros and Cons on this shifting ToD, as follows:
1. Pros
a) Some proponents have argued that shifting in ToD from FOB to CIF
for Indonesian export commodities with fully supported by the gov-
ernment policies will allow some benefit on Indonesian economy.
Furthermore, this shifting could increase the participation of locally
established shipping companies, freight forwarders and insurance
firms.
b) By shifting in ToD, the exporters would have an opportunity to pro-
mote national shipping industries. However, under this condition,
Indonesian-flag vessels should firstly be available in terms of the
quantity, quality, compatibility and reliability.
c) In line with promoting national shipping industries, shifting ToD will
encourage the Indonesian-flag vessel utilization. Meanwhile, it will
simultaneously be able to stimulate the national shipyard industries.
2. Cons
a) If the government imposes the policy of shifting in ToD from FOB
to CIF, then it is feared that the policy would have a negative im-
pact on existing international trade of Indonesia. Particularly for
homogeneous products such as rubber, shrimp, textile and footwear,
if Indonesia has to compete with other countries over these products,
forcing the use of CIF would potentially damage these manufacturing
industries.

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7 The Impacts on Shifting the Terms of Delivery

b) If the bargaining position of Indonesian exporters is less than of for-

eign importers, most likely the importers will look for other export-
ing countries meaning that this policy will have a counter productive
effect instead of allowing Indonesian exporters to demand higher
prices.
c) In case where Indonesian exporters have higher bargaining position,
this policy will remain a counter productive. This is due to the in-
firmity of domestics shipping industries, especially in terms of avail-
ability and compatibility of vessels to meet with the international
regulations. In short, the shifting ToD from FOB to CIF will automat-
ically be accepted only if national shipping industries enhance their
competitiveness globally.
d) Nonetheless, the shift in Incoterm from FOB to CIF will still allow
the seller to choose the carrier. The carrier may or may not fly the
Indonesian-flag. In case the carrier is foreign, a transport service is
still imported so the shift may have little impact. In case the carrier
is domestic but using the flag of convenience, a transport service is
exported and has a positive impact on Balance of Payment whereas
the flag is not Indonesian.
e) In terms of insurance, the possibility of gaining the advantages from
the policy of shifting ToD will definitely depend on the competitive-
ness of national insurance firm itself. There is no directly relation on
selecting insurance firm either flag state or nationality of the vessel
used on exporting Indonesian products.
f) Overall, selecting the Incoterms is totally authorization between buyer
and seller. By the time being, shifting ToD from FOB to CIF will im-
pose some industries to leave their business due to lower bargaining
position in the international trading.

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8 Conclusion and
Recommendation

8.1 Conclusion
1. The vast majority of CPO and Coal products are shipped under Free on
Board (FOB) term. Meanwhile, Rubber product is shipped under “Tra-
ditional FOB” term, which is similar with Free Alongside Ship (FAS) in
Incoterms and Shrimp product is shipped under Cost and Freight (CFR)
term.
2. The use of Incoterms is not always inline with the Export Declaration
record (PEB). For example, the common ToD of Shrimp and Rubber on
Export Declaration record was FOB. While the fact that Shrimp commod-
ity is using CFR terms and Rubber commodity is “Traditional FOB”.
3. According to Indonesian National Shipowners’ Association (INSA, 2016),
the composition of national fleets is dominated by barge (32.87%), tug
boat (30.8%). Meanwhile the proportion of national cargo ship (including
container ship, tanker and bulk carrier) is approximately 30%. Meaning
that the number of Indonesian-flag vessels to serve international trade is
very less.
4. In fact, the main Indonesian export products are transported with foreign-
flag vessels. However, in the case of coal especially for shorter route could
be served by Indonesian-flag vessels such as barge.
5. For selected commodities, which are transported by container due to a
small amount of export volume such as rubber and shrimp, the price
(freight rate) is very sensitive and difficult to control. It is because con-
tainer market is categorized as perfect competition market. Hence, the
higher freight offers on Indonesian shipping market will make buyers au-
tomatically move to other exporting countries, since there is no govern-
ment regulation about the use of CIF in other exporting countries (espe-
cially among ASEAN countries).
6. Shifting the ToD from FOB to CIF has potential to increase the national
income from the freight perspective. The evaluation resulted that total
potential freight for selected export commodities (CPO, Coal, Rubber and
Shrimp) approximately US$ 3.17 billion in 2015. The result also indicates
that the biggest opportunity to implement the CIF terms is for CPO and

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8 Conclusion and Recommendation

Coal because these commodities gave the biggest potential freight.

However, shifting the ToD from FOB to CIF should firstly look at the readi-
ness of the national fleets (Indonesian-flag fleets) in terms of the quantity,
quality, compatibility and reliability.
7. Indonesia was facing a total deficit of US$ 8.29 billion in 2015 and al-
most 74% deficit came from transportation service. According to this fact,
the evaluation of shifting the ToD from FOB to CIF has a potential to re-
duce the total deficit around 38.24% (from the potential freight for export
amounted by US$ 3.17 billion) in 2015.

8.2 Recommendation
1. The government policy of shifting the term of delivery from FOB to CIF
for Indonesian export products could lead on a counter productive effect.
It would appear when the bargaining position of seller (Indonesia) is less
than of foreign buyer and the commodity is categorized as homogeneous
(standard) products so that the buyer can easily move to other sellers.
2. In the short term, the government firstly needs to pay more attention to
improve the national maritime infrastructure in order to meet the interna-
tional standard (regulation and classification) by providing an incentive
to shipping companies or shipyards.
3. Under a CIF term, the sellers (Indonesian exporters) will have to deal
with a cash flow disruption and a delay of shipment. Therefore, the gov-
ernment should have a solution to cover the interest rate of Indonesian
bank until it can produce a competitive rate with other interest rates in
importing countries.
4. Considering to implement the term of delivery: Cost and Freight (CFR) in-
stead of CIF. Because a CIF term should take into account for both freight
and insurance premium, while current foreign insurance company offers
more competitive premium than national insurance company.
5. Indonesian export commodities that have potential to be shifted into CIF
term are coal and crude palm oil. Because these commodities are main
Indonesian export products and dominate Indonesian total export basket
volume. Moreover, a CIF term is more applicable on tramp shipping be-
cause of the principal “one ship, one cargo”.

108
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