Ship Chartering: Why the Freight Rate Is Not Enough

Two offers come back for the same cargo. One is four and a half dollars a tonne cheaper. On a twelve thousand tonne parcel that is fifty-four thousand dollars, and the decision looks like it has already been made.

It usually has not. The freight rate is the one number in a fixture that is visible immediately, which is why it dominates the comparison — and why the costs that arrive later are the ones that decide the result. This article takes a single, ordinary shipment and follows both offers through to the end of the voyage.

A worked comparison

The cargo: 12,000 tonnes of bagged fertilizer, one Asian loading port to one European discharging port, on free in and out and stowed terms. Cargo interests pay for loading and discharging; demurrage applies if the agreed laytime is exceeded.

Two offers:

• Offer A — gearless vessel, freight USD 48.00 per tonne, demurrage USD 9,000 per day;
• Offer B — geared vessel with four cranes, freight USD 52.50 per tonne, demurrage USD 11,000 per day.

On freight alone, A wins by USD 54,000.

Laytime at the discharging port is agreed at 2,000 tonnes a day, which gives six days for this parcel. The port has two mobile cranes available for hire at USD 5,500 per day each. With the shore cranes working two hooks, bagged cargo comes out at roughly 1,400 tonnes a day. With the ship's own gear, four hooks work and the rate is closer to 2,600 tonnes a day.

Offer B finishes inside her laytime and would in fact earn despatch; that credit is left out here, so the comparison understates her by a further day and a half of money.

The cheaper freight ends up USD 64,000 more expensive — and four days later. Nothing unusual happened: no strike, no weather, no dispute. The difference was entirely contained in the two words "gearless" and "geared", which appeared in both offers from the first message.

Reverse the port and the answer reverses with it. At a terminal with its own gantries and a proven 4,000 tonnes a day, the ship's gear is worth nothing and Offer A wins by the full fifty-four thousand. That is the point: the rate is not right or wrong on its own, only in combination with the berth it will be worked at.

Where else the rate hides cost

Intake

A vessel that cannot lift the full parcel is not a cheaper vessel. Where deadweight, hold volume or port draft limit the intake to 11,200 tonnes against a 12,000 tonne cargo, either the balance stays ashore or dead freight is paid on it. Both outcomes are more expensive than the freight difference that made the ship attractive. This is a question of stowage factor and draft, and it is answered before offers are compared, not after — see Stowage Factor and Cargo Reference.

Dates

A ship two dollars cheaper that arrives eight days later can cost more than the saving in storage, plant demurrage, truck standby or a missed contractual delivery at the far end. Where the cargo has a fixed deadline downstream — a construction schedule, a letter of credit expiry, a seasonal market — the laycan is worth more than the rate.

Port costs and who pays them

Offers are not always made on the same basis. One may be free in and out, another liner terms at one end; one may include taxes and dues that the other leaves to the charterer. Before two numbers can be compared, they have to be brought onto the same terms, and that is a mechanical exercise worth doing in writing.

The terms behind the number

Laytime and how it is counted — weather working days, Saturdays and Sundays, when notice of readiness may be tendered, whether time counts before the berth is reached — can move the result by more than the rate. So can the demurrage figure itself, the despatch provision, and the clauses covering strikes, congestion and ice.

The counterparty

A vessel is a commercial commitment for weeks. Vessel age and condition, the owner's record on performing fixtures, class and insurance cover, and the ship's acceptability to the receivers and their insurers all belong in the comparison. An owner who cancels a fixture at short notice costs the charterer a re-fixture in a market that now knows the cargo is distressed.

How to compare offers properly

The practical method is to stop comparing freight rates and start comparing landed cost per tonne. For each offer:

• freight for the quantity the vessel can actually lift, not the quantity enquired;
• plus loading and discharging costs under that vessel's gear arrangement;
• plus any port costs falling to the charterer under those particular terms;
• plus a realistic demurrage exposure at the rates the berth actually achieves;
• divided by the tonnes delivered.

Then the dates and the counterparty are set alongside that figure rather than folded into it, because they are risks rather than costs. A difference of a dollar or two per tonne is usually inside the noise; a difference in discharge rate, intake or timing usually is not.

What the broker is for

Finding open tonnage is the smallest part of the work and the part that is easiest to automate. The useful part is knowing that this berth has never made the rate written into the offer, that this owner's last three fixtures in the trade went smoothly, that a similar cargo fixed last week at a level that makes one of these offers look optimistic, and that a clause proposed in the recap will not survive the first delay.

That knowledge comes from being in the market continuously rather than at the moment a cargo appears. Kiev Shipping Ltd has been chartering ships since 2000 and has fixed more than 350 voyages in dry bulk, breakbulk, project and general cargo. We compare offers on the whole voyage, state the assumptions behind each number, and say when the cheaper option is genuinely the better one — which, often enough, it is.

Service overview: Ship Chartering Services. For shipowners looking at vessel employment rather than a single fixture, see Commercial Ship Management Services.

See also: Ship Chartering: From Enquiry to Fixture · Freight Indication vs Firm Freight Offer · How to submit a chartering enquiry · more in Ship Chartering.