Introduction to Chartering Introduction to Chartering

Dec 2009
Agenda
• Demand and Supply
Agenda
• Demand and Supply
• Cost Elements in Shipping Cost Elements in Shipping
• The market Participants p
• Different ways of Chartering
• Concluding a Fixture
• Risk Management / Freight Derivatives
Demand and Supply Demand and Supply
Costs Elements in Shipping Costs Elements in Shipping
• Voyage Costs
• Operating and Daily Running Costs
• Capital Costs
Voyage Costs Voyage Costs
• Bunkers • Bunkers
(Contracts/hedging/speed/fluctuations)
• Port
(Wharfage/Linesmen/Harbour dues/Light dues/Towage/Pilot)
• Canal
( / / l ) (Suez/Panama/Kiel....)
• Other Voyage Costs
(Cleaning/Taxes/War Insurance/Surveyors) (Cleaning/Taxes/War Insurance/Surveyors)
• Commission
(Broker commission/Address commission) ( )
Operating/Daily Running Costs Operating/Daily Running Costs
• Crew • Crew
(All direct and indirect charges)
• Stores and Miscellaneous
(Spare parts/Lubricants/Water/General Stores)
• Insurance
(H&M and P&I...)
• Repair and Maintenance
(Spares/Surveys/Dry Dock...)
• Administration Costs
(Chartering/Operation/Technical/Crewing/ Finance and
Accouning –all shore based)
C i l C Capital Costs
• Size of Loan
• Repayment Period
• Interest Rate
Th M k t P ti i t The Market Participants
• Owners
• Charterers Charterers
• Brokers
Charterer
Charterparty
Owner
Charterer’s
Owner’s
Charterer’s
broker
Owner s
broker
Owners Owners
The Owner is the vessel controller:
• Head Owner
• Disponent Owner/Operator
• Commercial Manager
• (Cargo Owners)
Types of Vessels Types of Vessels
Categorized by size
– ULCC > 315,000 MT
– VLCC 275,000 MT
– Suezmax 130,000-160,000 MT
Af /LR/C i 90 000 120 000 MT – Aframax/LR/Capesize 90,000-120,000 MT
– Panamax 50.000-84,000 MT
MR /Handy Size 30 000 40 000 MT – MR /Handy Size 30,000-40,000 MT
– GP/SR/Small Handy Size 20,000-30,000 MT
– Coaster 10 000 MT – Coaster 10,000 MT
– Barge 1,000 – 3,000 MT
Charterers Charterers
The Charterer is the cargo controller:
• Producer/Receiver
– Selling CIF
– Buying FOB
• Traders
• (Shipowners)
Brokers
• Exchange of information
(market/competition/fixtures)
• Exclusive/Semi
Exclusive/Comptitive (market/competition/fixtures)
• Network
(personal relationships...?)
/ p
• Specialised
(Segments/commodity/ship
• Intermediary
(Negotiating/knowledge)
sizes)
• Range of Services
• Paperwork
(Recaps/Charterparties)
(Reports,...)
• Operations
(ETA’s/times/demurrage...)
Different Ways of Chartering
• Voyage Charter
• Time Charter
• Bareboat Charter
Voyage Charter
• Transport cargo from A to B
• Charterer pays freight • Charterer pays freight
• Owners pays all voyage related costs
– Single Voyage (all space/part space)
– Consecutive Voyages – Consecutive Voyages
– Contract of Affreightments (CoA)
Time Charter
• Hire a vessel
• Agreed period
• Description of ship
• Cargo and trading exclusions
• Hire per day/month or per dwt in Usd p y/ p
(paid in advance)
• Chartererer pays all voyage related costs p y y g
Bareboat Charter Bareboat Charter
• Hire an ”empty” vessel
• Long period
(Purchase option)
• Description of ship
• Cargo and trading exclusions
• Hire per day or per dwt in Usd
(paid in advance)
• Chartererer has commercial and technical
ibilit d ll d il i t responsibility and pays all daily running costs
as well as all voyage related costs
Tanker Chartering
Voyage Charter
• Single voyage (spot) charters
g
• Voyage Charter
– Low risk
• Voyage Charter
– Low risk
• Consecutive voyages
• COA (Contract of
Affreightment)
• Time Charter
– Medium risk
• Time Charter
Affreightment)
• Charterer hires vessel for an
agreed period and pays for
• Demise or Bare Boat
• Time Charter
– Medium risk
agreed period and pays for
variable costs including
bunkers, port costs, canal tolls
Charter
– High risk
• Bare Boat Charter
Hi h i k
• Charterer hires ‘empty’ vessel
for a (long) period. Has to
id d f ll t – High risk provide and pay for all costs
including crew, insurance,
drydocking and maintenance
plus variable costs plus variable costs
Cost Distribution Cost Distribution
Employment Type
Bare Boat Time Charter Voyage Charter
Capital Costs Owner Owner Owner
Costs
Capital Costs Owner Owner Owner
Daily Running Costs Charterer Owner Owner
Voyage Costs Charterer Charterer Owner
Ch t t F Charterparty Forms
Voyage Charter Voyage Charter
• Dry (Amwelsh, Gencon,Polcoalvoy, Baltimore Berth
Grain, Welcon) , )
• Tanker (Asbatankvoy, Exxonvoy,BP Voy, Shellvoy,...)
Time Charter
(NYPE 93, Shelltime,BP Time,..)
Bareboat Charter
(B ) (Barecon,..)
Always with reference to a dated charterparty Always with reference to a dated charterparty
C l di Fi t Concluding a Fixture
• Voyage Calculation
• Negotiations
– Indication
– Firm offer
Example Voyage Calculation p y g
Indication Indication
We are pleased to indicate as follows: We are pleased to indicate as follows:
• Vessel: BowSky/oos • Vessel: Bow Sky/oos
• Laycan: Nov 10-20
Cargo: 10 000 mts biodiesel fromHouston to Rotterdam • Cargo: 10,000 mts biodiesel from Houston to Rotterdam
• Freight: Usd 45,50 pmt
D U d 35 000 d • Demurrage: Usd 35,000 pdpr
• Laytime: 350/350 mtph l/d shinc rev
Firm Offer
1. Reply time
2. Subjects
3. Name of Charterer/Owner
4 Vessel name short description 4. Vessel name, short description
5. Laycan (laydays/cancelling)
6. The cargo – full description g p
7. Load port(s) berth(s)
8. Discharge port(s) berth(s)
9. Freight
10. Payment of freight
11 Demurrage/Despatch 11. Demurrage/Despatch
12. Laytime
13. Commission
14. Charterparty Form/Terms
Risk Management / Freight Derivatives Risk Management / Freight Derivatives
•Risk Managment in Shipping •Risk Managment in Shipping
•Worldscale
•Freight Market Volatility
•FFAs
•Options
Risk Management in Shipping g pp g
•Risk in Shipping •Risk in Shipping
• Operational Risk (Freight, Revenue, Cost and Expenses)
• Ownership Risk (Price Fluctuations Accidents and Losses) • Ownership Risk (Price Fluctuations, Accidents and Losses)
•Traditional Hedging
• Time Charter, Bareboat Charter, CoA
•Introduction of Freight Derivatives g
• BIFFEX
• FFAs FFAs
• Options
Worldscale (WS) ( )
• NewWorldwide Tanker Nominal New Worldwide Tanker Nominal
Freight Scale (Worldscale) = annual
publication listing $/MT for voyage
between 2 ports.
• WS rate - % applied to flat rate to
calculate the $/MT rate for specific
voyage between 2 ports voyage between 2 ports.
Fl t R t WS R t $/t t Flat Rate x WS Rate = $/tonne rate
eg 5.40 x W150/100 = $8.10/MT
Worldscale Components: Worldscale Components:
•Standard Vessel
•Average service speed
•Bunker consumption p
•Port time
•Fixed Hire Element •Fixed Hire Element
•Port costs - In USD converted from local currency rates
•Canal Transit Time Panama and Suez •Canal Transit Time – Panama and Suez
•Bunker Price
Spot volatility - TD5 TA Route. Spot volatility TD5 TA Route.
350
300
200
250
U
S
$
/
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150
U
50
100
0
4
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8
Growth in FFA trading:
Volume of tanker FFAs fixed Volume of tanker FFAs fixed
400
300
350
participants
20%
250
300
o
n
n
e
s
20% owners
50% oil co/traders
30% financials
150
200
m
i
l
l
i
o
n

t
50
100
m
0
50
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Data Source: FFABA
Wh t i F d F i ht A t?
An FFAis a Swap
What is a Forward Freight Agreement?
An FFA is a Swap
• Principal to Principal contract with a buyer and a seller • Principal to Principal contract with a buyer and a seller
• An agreement today to buy or sell a freight rate at a
certain level for a defined period in the future certain level for a defined period in the future.
• To settle at a future date at a price based on freight
assessments taken during the settlement period . assessments taken during the settlement period .
• Based on a defined voyage or time charter.
• Over-The-Counter or Cleared. Over The Counter or Cleared.
Why use FFAs?
HEDGE
•manage freight exposure &
SPECULATE
g g p
cash flow
fl ibilit & bilit t t
SPECULATE
•High Volatility
•Cash settled
•flexibility & ability to react
swiftly to spot market volatility
(rather than time charter)
•Cash settled
• Clearing available
FSA regulated
(rather than time charter)
•trade-out of contracts
•FSA regulated
prior to settlement
The FFABA Forward Curve The FFABA Forward Curve
•FFAs need to be “marked to market” during FFAs need to be marked to market during
their life time.
•Cleared trades need to be margined •Cleared trades need to be margined.
•OTC positions need to be monitored for
internal reporting internal reporting.
•The Forward Freight Agreement Brokers
A i ti (FFABA) b t th i d il Association (FFABA) members report their daily
assessments along the curve to the Baltic.
•The Baltic publish the average prices daily.
O ti d fi iti Options - definition
An Option gives the buyer the right but not An Option gives the buyer the right but not
the obligation to take an underlying position.
Example Example.
You buy a Call Option (The right to buy)
P’Max Av 4 TC
Cal ‘08 27000 Call
Cost $1000 per day.
Result. Result.
If the market goes above 27000 a day in ‘08 you have all the
profit, once your cost of 1000 is covered.
If the Market Falls you only lose your 1000 a day.
Options Options
Call Option = Option To Buy Call Option = Option To Buy
Put Option = Option To Sell
Premium = Price Paid For Option
Strike Price= Level Option Set At Strike Price Level Option Set At
Breakeven = Level at which premium
is covered is covered
Long = Buy
Short = Sell
Grantor = Option Seller p
Th k f th tt ti Thank you for the attention