1. SWISS DERIVATIVES REVIEW 54 – SPRING 2014
Education
13
Laytime and demurrage
for the commodity trader
Computation of laytime and the resulting demurrage or despatch is simply a mean of settling whether the
­voyage
has gone faster or slower than under the terms negotiated in the Charter Party (C/P). For the trader/
charterer, when shipping rates are high or cargo profit margins in the SPAs are thin, demurrage can make a
­difference
between making or losing money on a cargo.
What causes Demurrage?
Congestion or simply events causing delays in a transportation
system. During October 2013, a major disruption happened in
the Pacific North West. While almost half of US wheat exports
pass through Portland and the Port of Vancouver, Washington,
zealous inspectors in the Washington Department of Agricul-ture
(WSDA – unrelated with the USDA but designed as inspec-tor
by the U.S. Grain Act) compromised the entire export sys-tem
reliability. They created congestion by making sporadic
­inspection
interruptions at Port Washington to support the In-ternational
Longshore and Warehouse Union in a labor dispute
at the Bunge/Itochu/STX export terminal venture. Demurrage
also arose at Canadian ports during winter 2013/2014. Canada
had a much larger crop in 2013. Vessels in Vancouver and
Prince Rupert, BC were on demurrage on a rail capacity short-age
to move a bumper crop and combined with severe winter
weather. Moving these piles of grain down in the supply chain
has also dropped cash grain prices to extreme low levels in
Western Canada.
Laytime and demurrage are two of the most
contentious subjects in a Charter Party
Demurrage risk is the chance that a transaction actual laytime
under the C/P will be different than expected. Demurrage risk
includes the possibility of losing or making additional money
(Despatch) on an original transaction based on actual laytime.
The North American Grain Export Charter party 1989
(NORGRAIN89) is recommended by BIMCO and FONABSA
as the C/P for the grain trade. A specific analysis of the NOR-GRAIN89
and its Laytime/Demurrage considerations is avail-able
on my website.
Demurrage Risk Management
It is equally important for ship-owners, brokers and charterers/
traders to pay very close attention to the Laytime/Demurrage/
Despatch clauses in the C/Ps. Demurrage cannot be traded like
oil or grain. But being non-tradable doesn’t mean that demur-rage
risk cannot be measured. Demurrage analysis supports
traders/charterers/operators but also a large range of stake-holders
needs from customers to shareholders. The trader can
calculate each transaction’s demurrage cost in dollars per ton
of cargo. If a trader calculates $0,70/MT demurrage on a cargo
and the gross profit estimated was 5$/MT, this means a –14%
deviation from the trade gross profit estimate. On a volume of
one million tons, $0,70/MT becomes 700,000$. And demur-rage
cost on some grain cargoes can reach more than $15/MT.
With a series of realized cargo transactions returns over a
period of time vs. voyage estimates, someone can calculate the
standard deviation over a mean return. Demurrage risk com-mands
higher freight quotes and higher cargo quotes especially
in the forward market because of the uncertainties of the future
delivery. For instance, a charterer may structure two quotes to
its cargo receiver: one lower quote for the final receiver who
agreed to pay demurrage risk in the commodity SPA and one
higher quote if the cargo receiver doesn’t agree to cover demur-rage.
Further, this shows the importance of buyers/sellers mak-ing
decisions with greater scrutiny of the temporal and spatial
dimensions of trading. As a charterer, you can work with your
risk management team to quantify this demurrage risk in your
forward sales quotes.
After the rapid expansion of global commodity trading over
the last ten years, we enter in a period where markets are bal-anced
by supply and an increased number of commodity trad-ing
firms. A supply market reacts differently than a demand
driven market. It will take some sizable drop in production and
disruptions to cause significant movement in prices or spreads
which will not happen all the time… In this cycle, the business
landscape for commodities is increasingly competitive. If trade
margins are to diminish in this competitive environment, then
demurrage will have a bigger weight on commodity merchants’
profitability and at the end, more than often making a differ-ence
between making or losing money.
Simon Jacques works at Grain K
Markets Limited, a cargo and
ocean freight liquidity provider
based in Canada. He is the author
of the Trade Shipping and Finance
Wizard blog covering AG markets,
Dry-Bulk FFAs and the Energy
Marine Trade.
http://jacquessimon506.wordpress.com/
Laytime – Time allowed by the ship-owner to the voy-age
charterer or Bill of Lading holder in which to load
and / or discharge the cargo. It is expressed as a number
of days or hours or as a number or tons per day.
Demurrage – The cost, or delay period resulting in the
cost, charged when a vessel fails to unload or load
within the allotted time period, or laytime, provided by
contract. A liquidating damages charge for contract
breach for detention of the ship. Demurrage is a penalty
for Charterers.