Freight Indication vs Firm Freight Offer: What Charterers Should Know

Two messages can contain the same freight figure and mean entirely different things. One is an estimate of where the market is; the other is a commitment by a named owner to carry a named cargo on a named ship. Treating the first as though it were the second is the most expensive misunderstanding in chartering, and it happens most often to people who are buying transport rather than selling it.

This article sets out what each one is, how each is produced, and what has to be true before a charterer can reasonably expect the second.

What an indication is

A freight indication is a working estimate of the level at which suitable tonnage is likely to be available, given what is known at the moment it is given. It is used for budgeting a shipment, for comparing sea transport against the alternatives, for pricing a delivered sale, and for deciding whether a movement is worth pursuing at all.

It is not an offer, it binds nobody, and it has no validity period — which also means it has no protection against the market moving.

How an indication is actually built

An indication is not a guess and it is not a memory of the last similar cargo. Behind a serious one there is a voyage calculation, assembled from the same elements an owner would use: the distance from where suitable ships are currently open to the loading port, the laden distance, the expected days in each port at the stated rates, fuel consumption and price, and the port costs at both ends.

Then a view is taken of the market — what has fixed recently on comparable business, how many ships are open in the window, and whether the trade is tightening or easing. The structure of that calculation, with numbers, is set out in Voyage Estimation Before Fixing a Cargo.

This matters because it explains why indications move, and why some of them are firmer than others. An indication given for a well-defined cargo in a liquid trade with plenty of open tonnage is a narrow estimate. The same exercise for an unusual parcel in a thin market is a range, and it should be presented as one.

What makes an indication change

• Vessel positions. The ship that made the number attractive fixes elsewhere, and the next candidate is eight days further away;
• The market. Freight levels in a given trade can move ten per cent in a fortnight without anything visible happening;
• Fuel. On a long voyage bunkers are the largest single cost, and the price is not fixed;
• Information. The cargo turns out to be lighter, or the berth shallower, or the discharge slower than assumed.

The last of these is the one within the charterer's control, and it is worth an illustration. An indication of USD 46 per tonne is given for a 12,000 tonne parcel on the basis of a discharge rate of 2,500 tonnes a day. The rate turns out to be 1,200, because the berth works one hook. The voyage is now four days longer for the ship, and the level that comes back on firm offers is USD 51. Nothing was misrepresented; a number was simply assumed because it had not been supplied.

What a firm offer is

A firm offer is a commitment. It names a specific vessel with her particulars, a freight figure, the main terms on which the cargo would be carried, and — always — a period for which the offer stands.

That validity is often measured in hours. It is not a negotiating tactic: the same ship is being offered to several cargoes at once, and an owner cannot hold a commitment open on one while the others move. An offer allowed to expire is frequently gone, and the ship that replaces it is a worse one.

Because a firm offer is a commitment, an owner will only make one when the shipment is defined well enough to be priced. That is the real reason enquiries are answered with indications: not caution, but the absence of the information a commitment requires.

What has to be settled before a firm offer

• the exact cargo description, with grade or specification;
• a firm quantity with a stated tolerance, and whose option it is;
• loading and discharging ports or berths, with draft and length restrictions;
• a laycan;
• loading and discharging rates, and the terms on which they are counted;
• the charter-party form and any clauses to be attached;
• gear requirements and hold cleanliness standard;
• commissions.

Cargo-specific requirements sit on top of that list, and they differ by sector: stowage factor and moisture for dry bulk, unit dimensions and lifting data for breakbulk and project cargo, coating and previous cargoes for tankers.

Offer, counter and the main terms

Negotiation runs through the broker in rounds. Each side replies to the whole of the other's message — accepting some points, countering others — and the exchange continues until nothing is left open. What is being negotiated is never only the rate; the list that moves most is laytime and how it is counted, the demurrage figure, the quantity tolerance and whose option it is, the cancelling date, and freight payment terms.

When the last point closes, the parties are agreed on main terms. They are not yet fixed.

Subjects

Almost every agreement is reached "on subjects" — conditions that remain before the fixture becomes binding. The common ones are:

• subject stem — confirmation that the cargo is actually available in the quantity and window agreed;
• subject shippers' or receivers' approval — the cargo interests accept the nominated vessel;
• subject management or board approval — internal authorisation on either side;
• subject inspection — the vessel is to be seen and accepted;
• subject details — the remaining charter-party terms are to be agreed.

Subjects carry a deadline. They are lifted, or they lapse and the agreement falls away — and while they are outstanding either party can, in practice, still walk. A charterer who treats agreement on main terms as a concluded fixture and stops looking at alternatives is exposed for as long as the subjects run.

Recap and fixture

Once subjects are lifted the broker circulates the recap: the complete agreed terms in one message. From that point the parties are bound, and the recap governs. The charter party that follows is drawn from it, and any difference between the two is raised immediately rather than at the discharge port.

Which to ask for, and when

Ask for an indication when the shipment is still being evaluated — when quantity, ports or dates could still change, when a sale is being priced, or when sea freight is being compared against other options. Give as much detail as exists, and say what is still uncertain; an indication given against stated assumptions is far more useful than one given against silence.

Ask for a firm offer when the cargo exists, the dates are real, the ports are confirmed and a decision can be taken inside the offer's validity. Requesting firm offers on a shipment that is not yet decided uses up the market's attention, and a charterer who does it repeatedly is quoted more cautiously the next time.

Kiev Shipping Ltd has worked as an independent shipbroker since 2000, with more than 350 voyages fixed. We give indications with the assumptions visible, say when a number is a range rather than a level, and take a shipment to the market for firm offers when it is ready to be fixed.

Service overview: Ship Chartering Services.

See also: Ship Chartering: From Enquiry to Fixture · Why the Freight Rate Is Not Enough · How to submit a chartering enquiry · more in Ship Chartering.