“Show me the money”
If you made it to the part 2 of Bulk Ship Chartering Guide trilogy, congratulations. The first part of Bulk Ship Chartering Guide is available here
In this post, we look into the way shipowners determine their freight. Along with this understanding, you can gain some bearings on how to filter through erroneous or unjustifiably bulk ship chartering freight rates.
As we know, bulk shipping and container shipping are two different animals. Container shipping lines generally have a structured matrix to determine their ocean freight rate to sell, they keep the calculation method closely guarded as a trade secret since the industry is a dog-eat-dog market.
On the opposite end, due to the variable nature of bulk shipping, every charter especially voyage charters warrants a process of detective deduction of fixed costs and variable costs, plus a keen understanding of the market to predict the circumstantial risks involved in the charter.
Finally, depending on whether shipowners are willing to take on the circumstantial risk, the shipowners will mark an ocean freight rate to reflect the voyage risk.
Once everything is distilled, freight calculation is a play between trying to estimate to the best of the shipowner’s abilities the cost of the voyage and charge a freight premium to take on the risks of losing money from the voyage.
Here we go through the steps of voyage charter freight estimation.
Step 1: Voyage Estimation
Without question, there are a lot of variables to consider when estimating a voyage potential.
Not only the exact voyage cost itself is tough to estimate, but the shipowner also has to consider the events before and after the voyage charter has been completed.
We’ll give you an example, vessels are constantly on deployment and its geographical location varies from time to time. With current flag state control regulations, a vessel under the right jurisdiction is allowed to navigate all around the world.
With that in mind, the shipowner may be presented with a spot market offer for a voyage charter. What goes through the shipowner’s mind is as such: –
- Is my vessel at the best location to accept the charter?
- Will the spot market rate reduce once this charter is completed?
- What are my other chartering options?
- Is my crew available for the length of the charter?
- Will my vessel’s final position after the charter will hamper my next charter potential?
All this occurs before and after the charter is even agreed upon. This is especially tricky considering most transportation is time-sensitive, and time is money.
Start by setting a voyage plan
We start by planning every minute detail starting from the port of loading to the port of discharge. From there on, we prepare a form in which we detail all aspects that occurs between the port of loading and port of discharge. Parts of the voyage plans to be considered are as follows: –
| Considerations ||Why?|
|Bunkering port||The most common bunker port is Singapore due to its strategic location; Bunkering port, similar to refueling stations, are best situated in between the port of loading and discharge|
|Total Distance Travelled||The distance between two ports in nautical miles.|
|Weather conditions||Weather conditions generally affect the amount of bunker fuel required for the voyage.|
|Canal costs||Passages through Canals such as Panama Canal and Suez Canal comes at a cost|
|Speed and Fuel Consumption||A balance between going faster to save time or going slower to save fuel.|
|Bunker at Sea||Fuel Consumption at sea|
|Bunker at Port||Fuel Consumption at port|
|Sailing Days||Number of days at sea|
|Laytime||Number of days allowed for discharging|
Step 2: Measurement of Cargo
Cargo measurements are considered in three aspects: –
- Volume Capacity
- Tonnage Capacity
- Vessel Capacity
To understand the measurement of cargo and the measurement of the vessel’s capacity, I feel it is most helpful to understand by first looking at the mathematical equation first.
Our ultimate goal is to find out the cubic capacity of the vessel chartered. And this is calculated by getting the deadweight cargo capacity to multiply by the stowage factor of the cargo.
At the same time, the Deadweight cargo capacity is derived from getting the Deadweight actual tonne minus the Bunker weight and the Constant.
Deadweight Cargo Capacity DWCC = The total weight worth of cargo the vessel can carry.
Deadweight All Told DWAT = The total weight the vessel can carry including fuel and supplies.
Bunkers = Fuel Costs.
Constant = Supplies on board for the voyage.
Stowage Factor = Chemically speaking, the stowage factor can be equivalent to the density of the cargo, the density of cargo equals the weight per cubic meter. A denser cargo requires less space to occupy 1 volumetric ton.
The density is usually proxied to the density of water, a higher density of 1 means that the cargo is denser than water, which means the vessel can carry less.
Step 3: Cost calculation
This is what makes or breaks a shipowner, being able to estimate the cost of the voyage to the closest decimal point is nothing short of a miracle. This is why shipowners have clauses in the charter agreement to lay claim to costs that are unpredicted.
Bunker Fuel Consumption
Of course, the crux of the cost breakdown is fuel consumption. A seasoned captain should be able to estimate the fuel consumption by looking at the voyage plan we laid out in step 1.
In addition, the shipowner also takes into consideration the draught and load line zones along the selected trade route.
One other interesting aspect of ship chartering is that the voyage may take up to one month to complete. By the time the voyage is completed, the fuel price may have fluctuated to a point where it is not profitable to refuel at a bunkering port.
Taking into calculation the cargo weight assigned to transport and the bunker fuel required for the journey, the shipowner will decide the speed, how much fuel to load, and the trade route to take. All of this will determine the final cost of the voyage.
Port Operation Charges
Port operation charges are charges imposed by port terminals for the services rendered at the port. The best way again, to describe the cost of port operation charges is to itemize them in the list below: –
|Pilotage||Services to navigate the ships, usually calculated by the Length Overall of Vessel|
|Towage||A use of tugboats to position the vessel|
|Mooring/Unmooring||Charges to moor the vessel onto the wharf with a rope|
|Custom Charges||State Customs regulatory charges for embarking to the country|
|Stevedore Charges||The person in charge of loading/unloading of cargos|
|Cranage||Fee for renting port cranes|
Step 4: Determine Income
Lloyd’s Shipping Guide has done a perfect job in encapsulating the net freight rate with this overall equation.
NET FREIGHT = [GROSS FREIGHT + (DEMURRAGE + DEAD FREIGHT + BALLAST BONUS – DESPATCH)] – COMMISSION or BROKERAGE
In essence, the net freight the shipowner charges the charterer is the gross freight minus any operational cost or incentives, deducting the commission rate and brokerage fee.
|Gross Freight||Cargo amount (calculation pre-agreed) x freight rate|
|Demurrage||Time spent in excess of lay time allocated|
|Dead Freight||Cargo tonnage the charterer promised but did not deliver, an additional cost to the charterer|
|Ballast Bonus||The additional bonus fee for the shipowner to reposition the vessel to another port|
|Despatch||The amount refunded to the charterer for not exceeding the laytime|
|Commission/Brokerage||Commission fee paid to charterer who is not the actual shipper|
GROSS VOYAGE RESULT = NET FREIGHT – TOTAL VOYAGE EXPENSES
From there we derive the gross voyage result by deducting the total voyage expense from the net freight. Total Voyage Expenses also includes
GROSS DAILY RESULT = GROSS VOYAGE RESULT ÷ DAYS OF THE VOYAGE
The Gross daily result is also known as the Time Charter Equivalent.
If you haven’t read part 1 of the guide, we invite you to look over here
Shipbroking and Chartering Practice, 8th Edition, Plomaritou and Papadopoulos, 2018