SHIP CHARTERING PRACTICES

DMM 2503

UNIT 4 : TIME MANAGEMENT AND

BUSINESS
IN SHIP CHARTERING
LEARNING OUTCOMES

To describe the key concepts and approaches of ship

chartering practices in the shipping business.

To outline the management and operation system

used in the hiring and leasing of ship chartering
process.

To corporate in group to formulate the opportunities

of ship chartering practices for better planning and
effective organization.
UNIT 4 : TIME MANAGEMENT AND BUSINESS
IN SHIP CHARTERING

4.1 The importance of time

4.2 Calculating time and business offers

4.3 Monitoring
The importance of time
 Timing is so important because taking a decision at the wrong moment,
the cost involved for the company, may be higher and the benefit
derived from it may be lower or even negative. This means that timing
has to take at least only those decision which provide the maximum
benefit in time by paying the minimum cost at times.

 The traditional chartering procedures require time and efforts. You

need to circulate your position via emails, talk with other
professionals continuously, filter hundreds of emails you receive every
day, ask for others’ ideas and try to find out whether your ship/cargo is
matching with the other cargo/ship.

 It sounds quite familiar, but when we are talking about modern world
with tons of data which are usually stored in our heads – this could be
a very exhausted routine. After all, you don’t always find the proper
business within time or you don’t have time left for other operations
Time in Port

 From the time a ship berths in a port, all efforts are geared to ensure
that she sails as soon as possible. Delays cost money as a ship
pays port dues for the time she is in port. Delays to cargowork can
also cause additional costs if labour has to be kept on standby. To
minimize delays, all aspects of her port stay need to be arranged
carefully.

 Cargowork must be thoroughly planned so that work goes smoothly.

Cargowork must get under way as soon as possible after she berths.
Cargowork must continue with as few interruptions as possible. The
best-suited cargo equipment must be used to ensure that the rate of
cargowork is maintained. (Some bulk cargoes, for example, can be
discharged by using vacuum discharge which will be much faster than
using skips.) If necessary, special equipment to handle cargo needs to
be arranged before the ship arrives e.g. a heavylift cargo may need a
special crane to discharge the item.
 Land transport arrangements for the cargo must be made well before
the arrival of ship so that loading and/or discharging is not interrupted
by a shortage of railway trucks or road trucks. Sufficient workers
(stevedores) must be contracted to ensure that a lack of manpower
does not delay cargowork. If the cargo is weather-sensitive (e.g. bags of
cement; paper; sugar) a special watch will need to be kept if rain is
expected, and loading will need to stop immediately rain threatens,
and resume immediately the rain is over.

 If the ship also needs other services while in port (e.g. bunkering,
repair work, taking stores, crew changes, etc.) these should be
arranged so that they are provided while cargowork is underway. This
saves time. Sometimes, weather will delay a ship from sailing. Strong
winds could disrupt container handling or cause a delay in sailing as the
pilot believes it is too dangerous to maneuver the ship in the wind. Rain
will interrupt loading or discharging of weather-sensitive cargo. A
weather delay (e.g. wind causing the stoppage of container handling)
will mean that the ship may have to speed up to reach her next port on
time. To maintain a faster speed, the ship will use more fuel and that
will cost more money.
Why Per-Day Costs Matter

 The single largest variable costs of a voyage are fuel and the cost
related to crew upkeep, and this varies in direct relationship to the
speed at which the voyage is performed. The speed of the laden
part of the voyage is agreed with the charterer when the voyage
charter is negotiated.

 The ship owner or the time charterer chooses the speed of the
vessel for the ballast voyage (when the ship is empty of cargo)
sailing the ship to a position where it can load a cargo for the
voyage charter. In both cases the slower the ship, the lower the
fuel cost as consumption will be lower and the faster the ship, then
the higher the fuel consumption and therefore the cost.
 The slower a ship sails, the longer the voyage (more days) but the
less fuel it consumes. So the calculation of the TCE will be affected
in two ways (as the Freight lump sum remains the same). The net
freight will go up because of the savings made on the fuel but at
the same time, it will be divided by more days taking the TCE
down.

 Therefore a ship should only go slower if the cost of fuel, saved by

slower sailing, offsets the reduction of the TCE caused by the
increase in the number of days the voyage lasted. If the fuel cost
saving justifies slower sailing then the owner will look to the lost
opportunity of the days that could have been spent on the next
voyage compared with the improvement in TCE from slower
steaming on the current voyage. This is a very important point but
the decision must be taken at the start of a voyage.
 The expenses of a shipping company fall into two categories:
Fixed daily costs
 which arise every day of the year,
regardless of the movement or
employment of the ship, and are
typically called daily costs in the
shipping world.
 They can be listed as follows:
depreciation, capital cost, crewing,
technical maintenance (including
drydocking), insurance and general
administrative expenses.
Variable costs
 which are the costs related to
a voyage (sailing the ship,
positioning or even waiting to
load or discharge a cargo).
They can be listed as follows:
bunker (fuel) costs, port costs
(including agent costs), canal
transit fees, towage and
pilotage.

 Even though they may occur every day, they are not daily costs
because they vary hugely as they relate to the service being
undertaken and in particular to the fuel consumption of the service
undertaken. Waiting might consume only 5 MT of bunker oil a day
whilst the consumption of oil when sailing depends on whether the ship
is empty (ballast) or laden (with a cargo on board), how much cargo is
on board and the speed the ship is sailing.
Time Charter Equivalent (TCE)

 Time charter equivalent (TCE) is a shipping industry measure used

to calculate the average daily revenue performance of a vessel.
Time charter equivalent is calculated by taking voyage revenues,
subtracting voyage expense, including canal, bunker and port
costs, and then dividing the total by the round-trip voyage duration
in days. It gives shipping companies a tool to measure period-to-
period changes.

 The time charter equivalent is calculated as:

(Voyage Revenues - Voyage Expenses)
Round Trip Duration in Days

 It can also be calculated on a per-day basis based on period, spot

and weighted average.
 TCE revenue is used as a measure of performance to
track performance from one period to another but it is
a non-GAAP measure. Companies may still choose to
report it in their financial statements as a footnote.

 The TCE is used by cargo brokers in the shipping

industry to present chartering opportunities to
shipowners. Chartering opportunities differ widely in
potential revenues and costs. The TCE is a way to
describe these opportunities in a standardized way —
essentially dollars per day — making comparisons easier
for shipowners.
 The TCE Earnings can be compared to the daily hire paid
under fixed term contract which is called daily Time
Charter Hire. However, although comparable, TCE Earnings
are not the same as Time Charter Hire. The Time Charter
Hire is a definite and certain amount that is known when
the contract is signed.

 The TCE is a calculated number which is not known until

all of the income for the voyage has been received and all
of the expenses paid. Only then the expenses can be
netted off from the Freight lump sum in order to arrive to
the Net Freight of the voyage.
 The duration of the voyage is also not certain. If due to
bad weather the voyage took longer than expected, the
earnings will be less than expected because more
bunkers will be consumed and the duration will
lengthen so the Net Freight is lower and will be divided
by more days.

 So Voyage Charter, where performance is measured in

terms of TCE Earnings, is significantly different to Time
Charter, where daily hire rate is fixed and certain from
the start of the contract.
Speed of the ship
 If you hire a cab on per hour basis, you would not expect
it to move slowly. If it does, you would end up paying
more money as it would take more time to reach the
destination. Similarly, under time charter, the charterer
would want the ship to run at speed declared by the
shipowner or agreed in the charter party agreement.

 It is the master’s responsibility to ensure that the ship

always maintains that speed. But what if the vessel is
experiencing rough weather and master is not able to
maintain the charter party speed? The time charter party
also have clauses for the weather conditions. So say, the
vessel is required to maintain 13 knots of speed when the
wind speed is less than BF 6. If the wind force is 6 or
more, the speed for that period will not count as under-
performance of the ship.
 This makes it so much important to note down the
weather conditions correctly in the deck log book as well
as in the noon report. At the end of an agreed period
(each voyage, quarter, half yearly or yearly as agreed in
charter party agreement) the performance of the vessel
with respect to speed will be analyzed.

 The single largest variable cost of a voyage is the bunkers

and this varies in direct relationship to the speed at which
the voyage is performed. The speed of the laden part of
the voyage is agreed with the charterer when the voyage
charter is negotiated.
 The ship owner or, if there is one, the time charterer
chooses the speed of the vessel for the ballast voyage
(when the ship is empty of cargo) sailing the ship to a
position where it can load a cargo for the Voyage Charter.
In both cases the slower the ship, the lower the fuel cost
as consumption will be lower and the faster the ship, then
the higher the fuel consumption and therefore the cost.

 The slower a ship sails, the longer the voyage (more days)
but the less fuel it consumes. So the calculation of the
TCE will be affected in two ways (as the Freight lump
sum remains the same). The Net Freight will go up
because of the savings made on the fuel but at the same
time it will be divided by more days taking the TCE down.
 Therefore a ship should only go slower if the cost of fuel,
saved by slower sailing, offsets the reduction of the TCE
caused by the increase in the number of days the voyage
lasted. Finally, if the fuel cost saving justifies slower
sailing then the owner will look to the lost opportunity of
the days that could have been spent on the next voyage
compared with the improvement in TCE from slower
steaming on the current voyage.

 This is a very important point but the decision must be

taken at the start of a voyage (the start of the ballast
passage - see Voyage Accounting below) but this is done
on the basis of unpredictable assumption regarding the
next voyage. At that moment, the current Voyage Charter
may not already have been fixed let alone the one after.
 Consequently, it is good practice upon discharge to sail at
the most economical speed away from the discharge port
to a way point (the last point at which the ship has full
optionality as to its destination). As an example, on
leaving China, this might be Singapore for orders. During
this period the vessel is being marketed for its next
Voyage Charter. Once the Voyage Charter is contracted,
the vessel should proceed at such a speed so as to arrive
at the port just in time to load the contracted cargo.

 It serves no purpose to arrive earlier as waiting adds

additional costs against which there is no certain
additional income. So in this example arriving early
worsens the voyage TCE Earnings.
 More fuel is consumed going faster and if the ship arrives
too early fuel is consumed waiting (to provide minimum
energy to run the ship) and there is no additional income.
If an earlier cargo lifting date could be contracted then the
issue is whether it would add sufficient additional income
to offset the additional cost of fuel for sailing faster.

 Still, if it does not, then arguably, the days gained may

translate into more value in the subsequent voyage but
with a high degree of uncertainty which will be lifted only
two or more months away and in a market subject to huge
volatility.
 In addition, speeding up means that the global supply of
ships is also going up and that, in itself, is likely to reduce
the freight market. There is therefore more chance that
the value burned in speeding up will NOT be recuperated
in the subsequent voyage as there is more chance that the
market will be lower by then.

 In this context it is also important to note that the

consumption of fuel, relative to speed, is not uniform and
at the top speeds ships consume exponentially more fuel.
For VLCC vessels, there is an inflection point above 13
knots and steaming above this speed, to save a few days,
will disproportionately increase the voyage expense
compared to the number of days saved.
Laycan
 The dates between which a ship must be a given place (as
agreed in the charter party) to start her charter and be
ready to load.

 If the ship is late, the charter can be cancelled or

renegotiated. If the ship is early, the shipowner is
responsible for all costs up to the starting date and time
of the charter.
Laytime
 The agreed number of hours it will take to load or discharge a ship.
This is included in the charter party. If the cargo work takes more
time than agreed, the charterer pays the shipowner an agreed amount
per hour of delay, which is called demurrage.

 If the cargo work takes less time than agreed, the shipowner pays the
charterer an agreed amount per hour, which is called dispatch. The
number of hours and the amount of money paid are in accordance
with the charter party.

 Delays that are caused by factors that are the fault of no one
involved in the charter are not subject to demurrage or dispatch. Rain
during loading a weather-sensitive cargo (e.g. cement or grain) or a
strike among shore side workers would not be subject to demurrage of
dispatch.
Notice of Readiness
 When his ship has arrived at a given place to start the
charter, the holds or tanks must be ready to receive the
cargo. They should be clean and dry. The Master issues to
the charterer a notice of readiness that his ship is ready
to load. The charterer sends a surveyor to check the
condition of the ship.

 If he is satisfied that the condition of the ship is

satisfactory, the surveyor will inform the charterer and
instructions will follow that loading can start. If the
surveyor finds that the ship has deficiencies and cannot
start loading, he will list the deficiencies and refuse to
allow loading to start until the deficiencies have been put
right.
Statement of Facts
 The vessel and the master of the ship are the owner’s representative
at the action site (loading port or discharging port). Ship Owner would
know only know the information that we provide them. They would
use this information for calculation of any demurrage due to the
charterers. But for the correct demurrage calculation, the information
we provide must be correct and we must not miss any important
information such as any delays. That make the statement of facts
(commonly called SOF) an important document. At the least,
statement of facts must include :
 any delays from shore side or from ship’s side and reason of delay
 any delays because of weather conditions
 Timings for the movement of the ship (such as times for anchoring,
anchor aweigh, pilot onboard, NOR Tendered etc)
 Timings related to cargo operations (Commenced cargo operation
and completed cargo operation
Off Hire
 If a ship does not meet her requirements in terms of the
charter party (e.g. she cannot maintain the agreed speed
because of a machinery problem; she suffers an engine
breakdown; a crane breaks down; the ship is detained)
the charterer can put her off hire.

 This means that she will not earn money during the time
she will be off hire. Some events do not count as time off
hire e.g. a ship diverting to assist a vessel in distress or to
land an injured crewmember, or weather-related delays.
Thank You