9. October 2014 13:13
In the deep sea tanker trade laytime is normally agreed as x number of hours for loading and discharging. ‘x’ is frequently 72 hours and would be if fixed on the basis of Worldscale Hours Terms and Conditions but of course it can be much more or much less depending on the size of the vessel, the type of voyage and the agreement of the Owners and Charterers.
Once agreed it generally doesn’t matter where the laytime is used as it is reversible and spread across as many load and/or discharge ports as the vessel visits in accordance with the limits placed in the fixture.
In the chemicals and lubes trades in particular laytime is often agreed on the basis of a loading and/or discharge rate. For example this may be 600 tonnes per hour (tph) loading/400 tph discharging so for a vessel loading 12,000mt cargo the time for loading would be 20 hours (12,000/600) and for discharging would be 30 hours (12,000/400).
It is normal for this laytime to be reversible so that any unused time at the loadport could be offset against the discharge port or vice versa so that in this case a total of 50 hours laytime would apply. A word of warning – reversibility must be expressly agreed in the charter party otherwise you could end up with demurrage payable at one port despite time saved at the other.
This is all well and good but consider this scenario. The vessel is fixed for a minimum of 12,000mt but charterers cannot provide more than 9,600mt. Under the terms of the charter party the charterer has to pay freight on 12,000mt – how much laytime is he entitled to?
The Cargo Quantity of 9,600mt gives rise to 16 hours (9,600/600) at the loadport and 24 hours (9,600/400) at the discharge port – a total of 40 hours for the voyage compared to 50 hours if based on 12,000mt.
The question is – is the charterer entitled to 50 hours because he has effectively paid for it in the freight and deadfreight, or only 40 hours because he has not loaded the full quantity envisaged.
I don’t think I have seen a case on this and I’m not aware of an arbitration but I suspect this has come up before. I think there are arguments to interpret it both ways but if I were to decide I would say that having paid freight on 12,000mt I believe the charter should be entitled to laytime on 12,000mt and get the full 50 hours.
What do you think? Have you had a case like this and how was it solved? Have you seen a court case or arbitration on this type of dispute that you can share with us?
Please add your comments here
4. July 2013 13:55
I am often asked how a demurrage rate is determined in a charter party. I reply that it is similar to fixing the freight rate but there are some differences.
How is the freight rate agreed? This is determined by two factors; the size of the vessel and the state of the market.
Most freight rates are quoted as a percentage of the flat rate per tonne of cargo as determined by Worldscale for their standard vessel. The standard vessel is 75,000 DWT so all things being equal a charter of a 75,000 DWT vessel should command Worldscale 100 (WS100), or 100% of the freight rate calculated by Worldscale. Of course this will rarely happen as the rate is influenced by the market so if there are few cargoes but lots of available ships the rate is likely to be a lot lower than WS100. Conversely if there are lots of cargoes and few ships the rate will exceed WS100.
Economies of scale. On top of this ‘market’ factor there is an element of the economies of scale so if the fixture is for a 270,000 DWT vessel it follows that the dollar cost per tonne of cargo will be less than that for a 75,000 DWT vessel on the same voyage. As a result the fixture will be concluded at less than W100. It works the other way round for smaller vessels.
What has this got to do with demurrage rates? Well the same principles apply in that the demurrage rate, usually agreed at a fixed value per day or pro rata is a reflection of both the market and the economies if scale. The demurrage rate for a VLCC of 270,000 DWT is unlikely to be almost four times that of a 75,000dwt tanker because of the economies of scale although it could happen if the market is tight in one sector of the market compared to another.
Whilst the freight rate is subject to spikes up and down according to market influences demurrage rates follow the same pattern but the spikes are smoother and they don’t hit the extreme top and bottom as seen in freight rates. This is illustrated by today’s market.
I understand that the freight rate today for a VLCC is approaching W45 – and I believe this gives the Owner a daily return of about USD22,000 per day. However the demurrage rate for a VLCC fixed today is around USD34,000 per day. Obviously the Owner must deduct the cost of idling bunkers to get a proper comparison with the freight rate return per day but it is clear from these numbers that the demurrage rate is better for the Owners.
I find it interesting that while Charterers are happy to take the freight rates as low as the market gives them they appear not to insist on reducing the demurrage rates to a comparable level. This is good news for Owners in this bleak market and even at its recent low point when freight was giving a return of only USD3,000 or 4,000USD per day the demurrage rate did not drop below USD20,000 per day.
The converse of this is also true in that when the freight market hits a high the demurrage rate lags behind the daily return achieved by the freight. In such cases the Owner hates getting delayed at any ports as he wants to get on and earn the next freight.
Back to today’s market - the Owner is earning more on demurrage than he is on freight and he must be praying for delays in port to earn demurrage and boost his earnings.
What is your experience of the relationship between freight and demurrage rates? Do you have an alternative viewpoint? Do my numbers add up? Let us know what you think by posting your comments here.