Costing for Shipping Principles of Voyage Estimating

What is the purpose of “voyage estimating”

•       The purpose of voyage estimating in a competitive market e.g., dry bulk or tanker, is for the shipowner to evaluate if the voyage is a profitable proposition

•       BUT it is not just about money: the shipowner has many other considerations to take in to account:

–      What type of cargo is to be carried – will it be damaging to the ship (e.g., engine blocks or harmful chemicals

–      Where will the ship discharge (extremely important for obtaining the next cargo)

–      Will it endanger the ship and crew

–      Will it breach international regulations

–      The shipowner’s relationship with the charterer – depending on the state of the market both parties may be prepared to adjust to accommodate the other

Costing for Shipping

•       For liner shipping, the short-run fixed cost is the cost of providing:

–      a string of vessels of similar size and speed to provide (for example) a fixed-day weekly service calling at 3 to 4 ports in N. Europe and 3 to 4 ports in the USA

–      A complement of containers (>3 times the capacity of the string)

–      On-shore management and support

•       Total cost >$500m

•       Ships can be switched if demand falls but they are increasingly being built for a specific route and lines are tied to 6 month to 1 year service contracts

•       Variable (marginal) costs are the costs of loading cargo up to the point where the ship is full or sailing would be delayed

Costing for Shipping – Time charter

•       For ships on time charter the shipowner pays only the fixed costs of providing a ship and crew:

–      Wages

–      Provisions

–      Maintenance and repairs

–      Stores, supplies & equipment

–      Lubricating oil

–      Insurance (Hull & Machinery, P&I, oil pollution)

–      Surveys

–      Overheads (shore-side support) charges

–      Financing

–      Some claims

–      Therefore the shipowner will quote a rate to Hire the ship that ideally covers all of the above – in practice the charterer has no knowledge of nor interest in any of the above costs

•       The rest (variable costs) is paid by the charterer including: bunkers, port costs and canal dues

•       So on a typical TC voyage the charterer pays:
Hire + port costs + bunker cost (NB it will be Hire that changes most radically – the others generally will be much more stable, ceteris paribus) = $/day (for a fixed period, say, 3 months)

Costing for Shipping – Voyage Charter

•       For ships on a voyage charter the shipowner pays all fixed and variable costs (including bunkers and port costs) with the possible exception of cargo handling costs

•       While fixed costs are known to the owner, variable costs must be calculated for each voyage to find the nett return for that voyage

•       The charterer also needs to calculate the cost per ton of cargo to decide if the cargo will be transported at the lowest possible cost

•       This is called voyage estimating and will be quoted as a rate per tonne ($/t)

•       NB voyage charters quoted in $/t are becoming less common because of the popularity of “Trip charters” whereby a single daily rate ($/day) is quoted i.e., similar to time charter

Result of the Voyage Estimate

•       In essence (for either a voyage or time charter deal) the shipowner will be calculating his total costs usually as a daily rate over the whole voyage

•       So if the owner’s calculation is that his daily costs are say, $10,000 per day, but the market is paying $15,000 pd then his profit will be $5,000 pd

•       Bear in mind that the shipowner still might not agree these terms if other considerations come in to play e.g., a view that the market will rise tomorrow to $18,000 pd, or that the vessel will end up in a location that makes it very hard to obtain a subsequent voyage

Tools for voyage estimating

•       Voyage estimating software (or form) including the following data inputs:

–      Marine Atlas

–      Marine distance tables

–      Port information

–      Cargo stowage information

•       Maps indicating load-line zones, International Navigation Limits and Emission Control Areas (ECA)

•       Details of areas requiring ballast water management plans or banning ballast water discharge

Emission Control Areas

•       MARPOL Annex VI introduced limits to SOx, PM (particulate matter) and NOx worldwide, to be brought into force in stages, with more stringent controls in designated areas

•       The simplest way to control SOx is by switching to a low sulphur fuel

IMO  Emission Control Areas

The Estimate

•       Where to start the estimate

–      from the loading port

•       best for charterer

–      discharge port to discharge port

•       best for the shipowner

–      voyage averaging

•       adding together a high value leg one way and a low value return, or a triangular voyage

For the shipowner the objective always is to “minimise the ballast leg” –  because the ship is only earning money when it is carrying cargo (unless of course it is on period charter where the charterer is simply paying a daily rate whether the ship is full or empty     

Starting Information

•       Proposed cargo and ports

•       Proposed charterparty and freight rate

•       Ship:

–      Speed and consumption loaded/in ballast

–      Cargo carrying/handling capacities

•       Load, discharge, bunker ports: canal transits, route choices

•       Estimated weather delays, time waiting

•       Quantity and stowage of cargo, loading and discharging rates

•       Running costs, voyage costs

•       Port information

Calculate the following:

1. Route details - where the ship goes
2. Time in port
3. Draft and deadweight calculations - what tonnage can she carry?
4. Cargo calculations - what, how heavy/what volume?
5. Voyage expenses: bunkers
6. Voyage expenses: the rest

Ø  Gross freight - money received

Ø  Gross daily surplus (time charter equivalent)

Ø  Net daily surplus - profit per day

Ø  Sensitivity analysis

1. Route section

•       Work out the routes to be taken

•       For each section of the voyage, calculate distance divided by speed to give time in days

–      Do you allow extra time at sea for bad weather?

•       Multiply time by bunker consumption

–       loaded consumption differs from ballast consumption

•       Don’t forget the International Date Line

•       Is there a bunkering port?

•       Will you have to change over to low sulphur fuel?

•       Is there a canal transit, with time waiting?

•       Do you need a ballast change?

•       Are you going to a Piracy zone?

–      Divert to take on/land guards

–      Divert to avoid high risk areas

–      Sail in convoy/daylight

2. Time in Port

•       How long will you wait for a berth?

•       How long to load?

–       What interruptions do you need to allow for?

•       Calculate total time in port and waiting, multiply this by port consumption

–      Usually only diesel oil (DO) consumption in port

3. Draft and Deadweight

•       Consider port/berth/river draft restrictions, at each port and canal, and fresh water allowance for rivers

•       Consider load-line restrictions (vary with time and place)

•       Note: this is a good time to check if other restrictions apply

–      air-draft

–      tidal restrictions

–      cargo-handling equipment

–      length alongside, length/width in locks, turning circle

Calculate maximum deadweight

4. Calculation to find cargo tonnes available

Take the following from the deadweight:

•       Bunkers

–      The greatest quantity during the fully loaded voyage can be anything from say 500-2,000 tonnes

•       Fresh water (often quoted 200-500 tonnes)

•       Constant weights e.g., sludge, stores, building error (dependent upon ship say 100-350 tonnes)

•       This gives the maximum weight of cargo that can be loaded

•       Example Panamax: 69,500-750-300-250 = 68,200t

4. Cargo calculation: Stowage Factor (SF)

•       A light cargo may fill a ship before she is down to her marks

•       All solid cargoes have a S.F.

•       This is the volume in cubic meters of 1 tonne of cargo, including packing, dunnage and broken stowage

•       Calculate the maximum volume of cargo that can be taken, in tonnes

Do we stow to weight or volume?

5. Voyage Expenses: Bunkers

•       Calculate the cost per ton of fuel remaining on board (ROB) and estimated cost of bunkers lifted during the voyage

–      Use up the ROB first

–      Then use new fuel

–      Do not include cost of fuel ROB at the end of the voyage

•       Fuel costs vary from port to port - it may be worth lifting less cargo to buy cheaper fuel

•       Add delivery costs e.g. from a barge alongside

6. Voyage Expenses: the Rest

•       Port disbursements (expenses)

•       Canal transit - tolls plus disbursements

•       Stevedoring - who pays to clean holds, deliver, stow, trim, unload?

•       Extra insurance - e.g., war risk, piracy, out of Navigation Limits

•       Piracy hardening and guards

Income for the Voyage

Gross Freight - actual cargo loaded x freight rate

+Deadfreight - payment for cargo not lifted.

+Demurrage - money (liquidated) damages from the charterer for keeping the ship too long in port

-Despatch - money back for the charterer for being quick in port

-Brokerage –broker’s commission, usually 1.25% x 2

-Address commission – paid to the charterer by the shipowner to cover chartering department costs, usually 1.25% to 5%

Nett freight = Gross freight + deadfreight + demurrage  - despatch - brokerage - address commission

Final Profit

•       From nett freight deduct total voyage expenses to give Gross Voyage Surplus.

•       Divide by time to give Gross Daily Surplus.

–      This can be compared with a daily time charter rate, after adding back in the commission

•       Deduct the ship’s daily running cost to give Net (Operating) Daily Surplus/Loss

•       A sensitivity analysis assesses the effect on the daily surplus of an extra $100 on or off the freight rate (or whatever rate is appropriate to the ship)