In the complex web of global timber trade, compliance with the European Union's Deforestation Regulation (EUDR) has introduced a new set of challenges and responsibilities for importers, exporters and suppliers.
One concern within this regulatory framework (unlike its predecessor, the EU Timber Regulation (EUTR)) is the risk of incurring demurrage costs. A financial penalty that can impact the bottom line of businesses failing to meet the 'Due Diligence Statement' submission requirements - a necessary step to obtain an Import Permit from the Customs Authorities in the EU Importer country.
This article discusses the importance of supplier cooperation in providing the necessary due diligence ahead of shipment to mitigate these risks, preserve market access, and avoid the financial repercussions of non-compliance for the importers.
The demurrage dilemma: A costly oversight
Demurrage charges — fees levied when cargo remains at a port longer than the allotted free time — represent a potential financial risk under the new EUDR. These costs could escalate quickly if unaddressed, resulting in considerable extra charges per day, depending on the port and the length of the delay.
In an industry where margins are often tight, it is important to look at how to protect profits and avoid strained relationships between buyers and suppliers. The imposition of demurrage fees due to incomplete paperwork required for custom clearance not only has the potential to affect immediate financial outcomes, but can also disrupt supply chains, leading to broader operational inefficiencies. But this can be avoided.
The EUDR Shift: Proactive compliance required
Unlike the EUTR, which allowed for a more reactive approach to due diligence, the EUDR mandates that importers (operators) submit a comprehensive due diligence statement with each shipment. This requirement aims to ensure that all forest-risk products entering the EU market are sourced from legal and deforestation free sources. However, this has placed a greater onus on importers to obtain and verify a complex array of documents from their suppliers before goods are shipped. Failure to provide this documentation in a timely manner can result in shipments being held at port, triggering demurrage fees.
Supplier Engagement: A crucial link in compliance
The regulation underscores the critical cooperation and role of suppliers in the compliance process. Suppliers can’t afford to be passive participants; they must actively provide the necessary due diligence documentation to facilitate seamless market access. Operators too need to think about how they can support and incentivise their suppliers to provide this due diligence information before any goods are shipped.
This shift represents a significant change from past practices, where requests for detailed sourcing information might have been met with resistance or confusion. Today, the stakes are a lot clearer: without compliance, suppliers risk not only demurrage costs, but also the potential loss of access to the EU market.
The direct link between due diligence and demurrage charges
A critical component of the EUDR compliance process is the submission of a 'Due Diligence Statement' to the online EU Information System. This statement is essential for the issuance of an Import Permit by the Customs Authorities of the EU importing country. By submitting this statement, the operator (importer) declares that they have conducted thorough due diligence on the shipment, concluding it poses a negligible risk of being non-compliant with the EUDR.
However, operators are only able to submit this crucial statement after receiving comprehensive due diligence documentation from their suppliers. This documentation allows them to confidently conclude the negligible risk status of the shipment. If operators are forced to delay the submission of the 'Due Diligence Statement' while awaiting necessary documentation from suppliers, the risk of incurring demurrage charges at EU ports increases significantly. And the responsibility for this added cost will likely lead to friction between suppliers and buyers.
This bottleneck underscores the direct link between the timely provision of due diligence by suppliers and the avoidance of costly demurrage fees. Suppliers are increasingly being asked to provide the Due Diligence information to the Operator before shipping, to avoid any consequential fees and to ensure the smooth importation of the goods into the destination country.
Educating and simplifying the process
To navigate these challenges, businesses must prioritise educating their suppliers about the importance of due diligence and the potential financial and operational impacts of non-compliance. Simplifying the compliance process, perhaps by designating a single point of contact within supplier operations who is responsible for gathering and providing the necessary documentation, can help mitigate the risk of delays. Moreover, leveraging technology and collaborative platforms, like iov42’s Interu, can streamline the due diligence process, making it more efficient and less prone to errors that could lead to costly demurrage charges.
The bottom line: prevention is key
In the face of these regulations, prevention is the best strategy. Businesses must work closely with their suppliers to ensure that all necessary due diligence is conducted and documented well before shipments reach the port, ideally, before it is even shipped.
This proactive approach not only helps avoid the direct costs associated with demurrage but also protects against the indirect costs of delayed shipments, damaged reputations, and lost business opportunities.
As the global timber and forest-risk commodity trade continues to adapt to the evolving regulatory landscape, the importance of due diligence cannot be overstated. By prioritising compliance and collaboration, businesses can safeguard their operations against the financial pitfalls of demurrage, maintain access to critical markets, and contribute to the broader goal of sustainable and responsible forestry practices worldwide.
Frequently Asked Questions
What Does Demurrage Mean?
Demurrage refers to the charges that accrue when cargo or a shipping container remains in the port beyond the pre-agreed free days allowed for loading or unloading. This term is pivotal in the shipping and logistics industry, serving as a critical factor that shipping companies, freight forwarders, and involved parties must consider avoiding additional costs.
What is a Demurrage Charge?
A demurrage charge is a financial penalty imposed on suppliers, freight forwarders, or consignees when cargo or containers are not moved out of the port or terminal within the allotted free time period. These charges serve as a compensation for the occupied space and the lost opportunity to use that space for other shipments. The cost of demurrage can vary significantly depending on the port, the shipping line, and the length of the delay, often calculated on a per-day basis after the free days have expired.
Who is Responsible for Demurrage Charges?
Responsibility for demurrage charges typically falls on the consignee or the receiver of the goods, although the terms of the contract between the shipper, the consignee, and the freight forwarders can vary. In some cases, like under the EUDR, the supplier may be held accountable if the delay is due to reasons such as late delivery of documents or failure to complete customs clearance in a timely manner.
How is Demurrage Calculated?
Demurrage is calculated based on a per diem rate agreed upon in the contract or tariff of the shipping line or terminal operator. The calculation begins once the free time period, a set number of days allowed for cargo loading or unloading without incurring extra charges, has expired. The demurrage rate typically escalates the longer the cargo remains unclaimed or not moved out of the port, incentivizing quick turnover and efficient use of the terminal space. Factors such as the type of cargo, container size, and specific port or terminal regulations can also influence the final demurrage cost.
What commodities are covered by the European Union Deforestation Regulation?
The European Union Deforestation Regulation (often referred to as the EUDR) applies to the following commodities: cattle, cocoa, coffee, oil palm, rubber, soya and wood.
