Shipping risks in a high freight market

  • 16 December 2004

Increasing commodity prices and high charter rates could result in unexpected risks for the shipping industry, according to ICC’s International Maritime Bureau (IMB).

With the value of cargo and the price of freight both on the rise, the IMB is recommending that shippers take extra precautions to protect their financial interests. IMB Director Pottengal Mukundan stated: “Market prices for high demand resources such as coal and steel are high. Some suppliers of these commodities have sought to avoid previously agreed commitments at lower prices. In many cases this has occurred after the chartering agreements has been concluded. Clearly, this poses a problem for charterers who have fixed vessels to carry the cargo and find themselves caught in the middle of disputes between buyers and sellers.”

These chartered vessels arrive at the load port to find that the shipper does not wish to load the cargo as originally contracted. The charterer thus finds himself subject of a substantial claim for deadfreight/demurrage. At current daily charter rates, even a few days delay can be an extremely expensive proposition. The situation can prove even more costly in cases involving short term contracts of affreightment, where a number of vessels may have been fixed. In a recent case two vessels fixed to load cargoes from China had to be diverted, at considerable cost, to load other shipments when the original shipper defaulted.

The IMB advises owners and operators of chartered vessels to thoroughly investigate the financial viability and track record of all parties involved in the sale contracts as well as the disponent owners and charterers of the vessels. Captain Mukundan said: “Given that freight rates are now an important component in the total cost of the delivered goods, looking closely at the financialviability of the whole venture before committing is critical. In the current economic climate, even a few days unexpected delay could be sufficient to change a profitable transaction – from the charterers’ perspective – to a loss making one.”

In addition to increases in freight rates and commodity prices, the IMB notes that fuel consumption/speed claims under time charterparties are being closely monitored by charterers. With high daily charter rates these claims become increasingly significant. Some major charterers have developed sophisticated software for monitoring these claims on a daily basis incorporating weather and voyage data from a number of different sources.

Captain Mukundan concluded: “Buoyant freight rates are good for the shipping industry, but they come with risks. To ensure profitability and the successful movement of goods, it is important for shippers to understand and mitigate these risks.”