Ok, I want to convince you that the ship chartering industry is a fulfilling and yet exciting industry to be in. It is a risky business, but if it is done right and properly arranged, it can be incredibly gratifying. There is no shame in feeling proud that you have assisted in making the world go-around by being a small part of the overall logistics chain.
This 3-part blog is a general guide, but by all means, this is not a comprehensive guide. There are industry practices and know-how that takes experience and firm knowledge. That knowledge varies from country to country, trade lane to trade lane, vessel to vessel, and contract to contract.
Think of a ship charterer as a match-maker, their task is to find the shipowners and cargo owners the best match in terms of geography, handling requirements, loading factors, vessel sizes, prices and so on.
In the first part of this guide to ship chartering, we will cover the chartering strategies currently employed, as well as the forms of charters in the market. If you have reached this far into the introduction, kudos to you, for keeping your interest.
General Facts about Bulk Ship Chartering (if you haven’t already known)
You are here to know the ins-and-outs of ship chartering, not some statistics to show how people have been doing it successfully and the breakdown of what ship does what route. But, bear with us for a moment as some of the aspects learned here may assist you in general.
If you haven’t already known, ship chartering mostly refers to bulk shipping transportation, which is the transportation of homogenized cargo products, in contrast to a liner shipping business where cargos are loaded in bigger quantities and cargos are not homogenized, the homogenization comes from loading all cargos in ISO certified Containers for easy loading/unloading.
In bulk shipping, there are many ways to charter a ship, but predominantly there are three methods of chartering or a combination of elements of charter listed below: –
- Time Charter
- Bareboat Charter
- Voyage Charter / Spot Charter
These charter types will be the main focus of this first part of the bulk shipping guide.
Unlike liner shipping, which operates as a “common carrier”, the operation is in line with the arrangement of the Bill of Lading, where terms and conditions are set according to Hamburg Rule, Hague/Hague-Visby Rule, US COGSA, depending on the liner and trade route.
The business of bulk ship chartering can be both complex yet simplistic in its core. Essentially, the main parties of the contract of affreightment can be as few as 2 to 4 parties only, which can be akin to a buy-and-sell transaction with a more complex layer of delivery procedures.
Liner shipping utilizes a hub-and-spoke method in sea transportation. With the cost of transshipment in large ports becoming cheaper and are able to accommodate larger vessels, Liner shipping routes typically use a mother vessel to circumnavigate a fixed trade route. Shipping lines then unload containers at strategic ports for the feeder vessels to carry it to smaller ports with limited facilities or limited trade volume.
In contrast, bulk shipping takes a different approach. Loading and Unloading a non-containerized cargo is slower and costlier. In addition, due to the nature that the freight agreement is between one buyer and one seller only, the vessel chartered has to be able to reach the final destination.
Freight Market Price
In summation, the demand and supply of bulk shipping freight dictate the overall freight price. I can practically just stop here.
The price makes or breaks the charter agreement. The so-called “open market” system the bulk shipping industry employs fundamentally means it is a “willing buyer, willing seller” market.
Because the freight market price is an open market, prices tend to be more volatile. One voyage’s profitable charter may not be the case for the next due to, for example, a sudden shortage in bunker fuels.
Liner freight rates are more structured, regimented and calculated. Hence, the fluctuation will not significantly impact the overall profitability of the voyage. Primarily, because the cost is shared among all the freight bookers and also the voyage cost is made low due to the size and scale of liner ships nowadays.
It is practically impossible to predict with any degree of certainty future developments in the freight market. There is really no such thing as a “normal” market level and it would be more accurate to say that the freight market constantly oscillates between extremes.
As a charterer, you need to be very aware of the economic conditions of various trade countries as well. The world economy we know today is so intertwined that one heatwave that wiped out a crop cycle in Argentina, may have a domino effect to dry bulk freight.
Since there is no longer cargo in Argentina, there is a surplus in available ships to charter. And invariably the market will have lower freight rates to remain competitive. Of course, this is just one of the many permutations that may or may not happen. We are not shamans; We do not know.
Types of Charter
As a charter takes place, the charterer or the cargo owner has to ascertain all aspects of the vessel. Most importantly it is the duty of the shipowner to provide the documents as proof of the vessel’s seaworthiness.
The charterer has the right to inspect the vessel to see if the vessel is as what was advertised. Down to the port inspection report, maintenance records, down to the mill certificate issued for the specific steel used to repair the hull. All of this has to be available at the request of the cargo owner.
Here is a ship vessel detail examples you need to be accustomed to: –
|Ship Name||SM Navigator|
|Classification Society||Korea Register of Shipping|
IMO Number – International Maritime Organization’s Unique Registered Number
MMSI – Maritime Mobile Service Identity, to call the vessel at sea
Call Sign – Added Unique identifier for Vessels, to prevent confusion
Voyage charters are also often called spot charters. Normally, voyage charters refer to a single expedition, whether it is calling multiple ports or not. It expires once the voyage is over.
From a practical point of view, a voyage charter means that the owner promises to carry on board a particular cargo from one port to another. The vessel shall arrive at the first loading port and be ready to receive the cargo on a certain day or within a certain period of time.
The shipowner is in complete control of the vessel’s voyage, operationally speaking.
First and foremost, a port is nominated for loading and discharging, and agreed upon by both parties.
Sometimes the port or berth may not be known at first, the charterer can choose to nominate the port during the voyage, provided the shipowner agrees also.
The charterer also gets to decide the route the shipowner takes to reach the destination port/berth. However, by default, and subject to the relative geopolitical safety of the traditional route, the shipowners will habitually choose the most cost-effective route (which may not be the shortest route in certain aspects).
In a voyage charter, it is important for the shipowner to understand the cargo the ship is intended to transport. In parallel, it is important for the charterer to understand the ship is able to transport said cargo.
Therefore, both parties much work together mutually to reach a complete understanding of each other’s capacity.
This part is very important, and if one party fails to educate the other party of its capacity, albeit a misrepresentation of facts, miscalculation, or fraud. The victim of the damage is allowed compensation by the terms outlined in the charter.
The freight can be fixed in several different ways. One way is to base it on the cargo quantity, for instance, “X $ per metric tonne” or “X $ per carton”. Another way is to fix the freight at a certain amount independent of the cargo quantity. This is usually called “lump-sum freight”.
When is the Freight Paid?
All things considered, freight is generally paid on a Cash on Delivery basis, which makes the collection of service rendered part simple. However, the charter can be negotiated to be either in “freight prepaid” or “freight payable. Which in essence, means the freight is paid either at the port of loading or the port of discharge.
It has to be clearly stated on what the freight is based upon, in order to avoid any ambiguity. One may contend that the freight should be based upon metric tonne, another ration that the freight should be based upon long ton or gross weight vs net weight.
If there is a discrepancy between the loading weight and the discharge weight, the final freight payable should always be on the discharged weight, and charged on what is deemed to be in “merchantable condition”.
But what happens if the exporter promised 10,000 tons but only manage to muster 8,000 tons? The exporter, in this case, has to agree to pay “dead freight”. In this industry, the profit margins are very slim, hence the shipowner is entitled to compensation for the disparity.
Of course, there are more aspects to a voyage charter, such as the INCOTERM, the brokerage fees, the loading/discharging procedures, the laytime, detention, and demurrage calculation. These will be addressed properly in later parts of the blog
In a Time Charter, the exporter/charterer has more control over the commercial employment of the vessel.
If hailing a taxi to get to your destination is a form of voyage charter, then time charter is similar to renting a car from Axis for an agreed amount of time, with the slight difference is that the crew is still under the administration of the shipowner.
In a Time Charter, there is no restriction of requiring the charterer to fulfill the promised freight tonnage in one voyage. The vessel is basically, the charterer can basically do what they want, the shipowner job is merely maintaining the vessel in seaworthy conditions.
Of course, like renting a car, there are bound to be terms and conditions to the use of the vessel that is pre-agreed upon, such as the geographical boundaries, vessel speed, excluded cargo, final delivery of vessel and bunker fuel type.
At the end of the charter period, the charterer has to redeliver the vessel to the owner at the place or area agreed.
Similar to a voyage charter, both parties have to be completely transparent in laying information between parties. Failure to do so will compromise the charter, and result in compensation and ultimately, a loss in revenue.
Charters in this form are calculated on a “per day basis”, for example, “X US Dollars per 30 days”, “X US Dollars per day”, “X Euros per 30 days and deadweight ton”. The choice depends mainly on the type of vessel and the trade.
When is the Freight Paid?
Unlike a voyage charter, time charter arrangements are paid in advance. Resembling once again the practice of renting a car from the airport. The reason why Time Charters is arranged this way is that shipowners do not have control over the cargo shipped and therefore are not able to hold the cargos as a lien for security. However, these arrangements are, once again, negotiable between both parties.
On a scale, the risk of the shipowner to agree to this form of the charter is the riskiest, and from the perspective of the charterer, a bareboat charter may be seen as the most expensive among the other options. But if this is arranged carefully, the average cost per ton in a bareboat charter may be the cheapest.
As the name suggests, bareboat charters are where the shipowner leases out the vessel, as is.
Everything will be up for negotiation. For example, the vessel’s commercial operation, navigation, delivery and redelivery, manning, insurances, maintenance and repair, cargo handling, cargo liability, hire payment, lien, and indemnity, claims against third parties, etc.
For this to work, there should be a high degree of trust between the charter-parties, or at the very least, long-standing past business dealings.
Referring back to the car rental analogy, in this form of charter, the length of charter comes in months or even years. Plus, the condition and operation of the car are entirely at the supervision of the person renting that car. In a Bareboat Charter, the charterer effectively becomes the “quasi-owner”
Insurance plays an important role in underwriting the risks in a bareboat charter, the charterer has to maintain proper insurance from the Property and Indemnity Club (P&I) and insurance for the hull and machinery of the ship.
Concluding Part I
Shipbroking and Chartering Practice, 8th Edition, Plomaritou and Papadopoulos, 2018