Knowing about Freight In fertilizer trading, most major international trading houses buy on FOB and sell on CFR/CIF. They typically have their own freight departments acting as in-house service providers to the company’s fertilizer traders, getting them competitive freight rates, hedging freight rate risk and advising the best course of action — such as optimal size of vessel, laycan and Time Charter (TC) vs Voyage Charter (VC).
As profit margins on back-to-back fertilizer trading are very slim, every cent counts. Therefore, it is imperative that you account for all the potential costs, such as freight, shrinkage, insurance, inspection, finance, with cost of freight being the biggest constituent of a fertilizer trade after the cost of product.
Taking a recent example of the urea tender into India, in 2020, you could book a panamax on VC for USD 15–18 per metric tonne (pmt). Today, it is USD 35–38 pmt. Putting the figure in context, the freight cost is now USD 20 pmt higher than a year ago, which equates to USD 1.2 million on a 60Kt shipment. The typical Gross Profit on this kind of trade would be USD 1–2 pmt, or USD 60– 120k.
Budgeting your freight costs wrongly can have a substantial impact on your Gross Profit. This is not even considering any potential claims on demurrage, shrinkage, or quality etc, so what could have been a small profit may suddenly turn into a large loss.
Not only do you have to consider your voyage rate when booking a vessel, other factors have also got to be considered for example load and discharge rates. SSHEX, SHINC, FHEX, FHINC these acronyms play a pivotal role in making you or losing you money! SSHEX meaning Saturday, Sunday and Holidays are excluded from time accruing, SHINC mean Sunday, Holiday Included ie time is always counting.
In layman terms, when a vessel arrives at port, the master issues a notice of readiness (NOR) ie I am ready to load/discharge. Your time will start to count as per your agreed charter party usually 9am the following day if your vessel arriving the prior afternoon/evening or 1PM if it arrives in the morning.
At this point this is where you can either make or lose a lot of money. If you have fixed a vessel to discharge say at 8000 SHINC and you sold to your customer on 6000 SSHEX, lets do the math on a typical handy sized vessel, assume 30,000Mts, and daily hire is USD 25000 per day.
Let’s assume the vessel arrives Wednesday night, NOR tendered straight away, that means your lay time starts at 9AM Thursday morning we have fixed with vessel (a) 8000 SHINC so that means 30,000/8000 = 3.75 days (or 90 hours) but sold to customer (b) 6000 SSHEX so 30,000/6000 = 5 days (120 hours)
In example (a) Demurrage starts at 3AM Monday morning and (b) Demurrage starts at the following Friday at mid night.
Let’s assume the vessel completed discharge on Thursday at 15:00 hrs and it did not rain, and there were no other mitigating factors, according to your customer you have completed within the specified time. Now the ship owners invoice arrives: 3.5 days demurrage at USD 25000 per day = USD 87,500.
With misaligned load and discharge rates you could get yourself into a lot of trouble or make a lot of money!
Other factors to consider when chartering vessels, is the port always congested (Paranagua/Brazil), you tender your NOR and you have to wait to berth for 15-30 days? transit times with the Panama canal and now red sea both in trouble, this extends voyage times (can your cargo survive an extra 30 days in the hold?) is your customer in desperate need of the goods?
When you are in the market checking on available vessels, are you asking your brokers or owners for address commission? It is usual for whoever charters the vessel to receive 1.25% or sometimes 2.5% commission? Another income stream?
To summarize, knowing your incoterms and freight, is just as important as knowing how to trade your goods and always remember the shipping saying “Once on demurrage, always on demurrage!”
