Commercial Ship Management: Voyage Estimation Before Fixing a Cargo

Every fixture decision comes down to one number, and it is not the freight rate. It is the time charter equivalent — what the voyage earns the vessel per day once the costs of performing it have been taken out. Two cargoes at very different rates can produce the same daily return, and the same cargo can produce two very different returns depending on where the ship happens to be.

The calculation itself is not complicated. What makes it useful is doing it before the offer goes out rather than after the voyage is over.

What goes into an estimate

A voyage estimate has four parts: the income, the time, the fuel and the port costs.

• Income — freight for the quantity the vessel will actually load, less address commission and brokerage, plus any demurrage expected and less any despatch;
• Time — ballast days to the loading port, laden days to the discharging port, and the days spent in each port including any waiting;
• Fuel — consumption at sea laden and in ballast, consumption in port, and the price of each grade at the bunkering point;
• Port costs — dues, pilotage, towage, agency and any canal or passage charges.

What is left, divided by the total days, is the time charter equivalent. That figure is what gets compared against the period market, against the vessel's daily running cost, and against every other cargo on the table.

A worked example

A 12,500 dwt geared general cargo vessel is open at Singapore. The cargo on offer is 11,500 tonnes of bagged fertilizer from Shanghai to Jebel Ali at USD 58.00 per tonne, free in and out, with total commissions of 3.75 per cent.

The vessel burns 16 tonnes a day at sea laden at 11.5 knots, 14 tonnes a day in ballast at 12 knots, and 2.5 tonnes a day in port. Fuel is taken at USD 560 per tonne. Loading is expected at 1,500 tonnes a day, discharging at 1,200.

Figures are illustrative and are used here to show the structure of the calculation, not current market levels.

The two numbers that move the answer

Position

The ballast leg in this estimate is 2,150 miles and costs seven and a half days and 105 tonnes of fuel before a single tonne of cargo is on board. Suppose the same vessel were opening at Qingdao instead — four hundred miles from the loading port.

The freight is unchanged. The voyage shortens to 39.0 days and the fuel bill falls by about USD 47,800. The result rises to USD 337,200 and the time charter equivalent to USD 8,646 per day — thirty-five per cent higher on exactly the same fixture.

This is why an owner's first question about any cargo is where the ship is, and why a broker who knows the vessel's position can tell within minutes whether a cargo is worth working on.

Port time

Now take the original estimate and assume discharging runs four days longer than expected — a congested berth, a slow gang, rain on bagged cargo. Four extra days cost ten tonnes of fuel and, more importantly, four days of the denominator.

The result becomes USD 283,772 over 49.1 days: USD 5,780 per day, ten per cent below the estimate. If those four days fall outside the agreed laytime, demurrage recovers part of it; if they fall inside, they are simply lost. Which is why the agreed rate and the rate the berth actually achieves are two different questions, and only one of them appears in the charter party.

What estimates routinely miss

• Waiting time before berthing — in a congested port this is not a rounding error, and whether it counts as laytime depends on a clause, not on fairness;
• Intake below the full cargo — a draft restriction that cuts the parcel by five per cent cuts the freight by five per cent while the costs stay where they are;
• Bunker price at the point of lifting — an estimate built on today's price at the wrong port is not an estimate;
• Hold preparation between cargoes — reaching grain clean after a dirty cargo takes days that belong in the voyage, not outside it;
• The next position — a voyage that ends in an area with no outbound cargo has borrowed against the following fixture.

That last point deserves emphasis. A voyage earning USD 6,400 a day that leaves the vessel well placed can be worth more than one earning USD 7,000 that strands her. The estimate covers one voyage; the decision covers the next one too.

Comparing against the alternative

A time charter equivalent only means something next to a benchmark. In practice owners compare it with three things: the vessel's daily running cost plus capital, the period rate currently available for that size and age, and the other cargoes open at the same moment.

A voyage below running cost may still be the right decision if it repositions the ship into a stronger market, and a voyage above the period rate may be the wrong one if it takes the vessel out of the trade for two months. The calculation gives the number; the judgement is what to do with it.

Kiev Shipping Ltd prepares voyage calculations for shipowners as part of commercial ship management and vessel employment, with more than 350 voyages fixed since 2000. We present the estimate with its assumptions visible — speeds, consumptions, port costs and expected port time — so that the owner is deciding on the same basis we are.

See also: How Shipowners Can Improve Vessel Employment · Commercial Ship Management for Shipowners · more in Commercial Ship Management.