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Thursday, February 18, 2010

Answer - Demurrage and freight rate relationships.

Ok guys - here is the short answer.

Gary is correct that most prevalent reason is that charterers think they are being conservative by allowing for more time then is actually needed. So they think that by agreeing to slower rates that they will somehow protect themselves from demurrage and other costs.

The problem with this idea is that the shipowner factors this extra time into the freight rate. So although they may be saving on demurrage and possible even making some despatch money - the chances are they are losing money overall due to the higher freight rate charged by the shipowner.

(remember a shipowner arrives at a voyage freight rate by calculating costs and the time taken to perform the voyage. Each minute means more cost)

So the truth is that when charterers stuff around with terms that arent back to back with the suggested times from the port authorities, they are doing so at a cost. Charterers think they are being clever but the opposite is sometiem the truth.

I should explain alittle more about how load and discharge terms are agreed. This will show why charterers do this.

In the sales contract these loading and discharge terms are agreed (depending on cnf or fob but thats not important for this discussion). Then these terms are used by the charterer in the shipping contract. The charterer is under no obligation to go back to back with the sales terms. This is when many charterers decide to be conservative and slow the terms they give the shipowner.

Part of the problem is this. Non shipping companies (mining co's trading companies, agri firms) hate it when they see demurrage bills.

Its very visible and is seen as a huge cost. Accountants worst nightmare.

A higher freight rate is a commercial problem - sales or purchasing departmetns nightmare.

The problem is they do not understand the link between this cost and the freight rate. The higher the demurrage bill may infact be in direct proportion to a smaller freight rate. The lower the demurrage bill may mean they are paying more for freight. So really the overall exercise is borderline futile!

They appear in different parts of the accounting ledger and different part of the corportate boffins brain!
If you know how to run a voyage estimation you can see in real life how these costs and revenues interplay with eachother. An important process for any shipping executive to understand. I cant tell you how many contracts and disputes I have resolved very quickly just by understabnding this interplay!

This is advanced charterering 2.1

Any questions just shoot!



  1. Hi can u please explain me tht,
    Shall we count the laytime if the vsl is waiting at the port for her turn, due to conjestion caused by bad weather (rain). So raining time shall be excluded from laytime even is the vsl is waiting for her turn at the port?

  2. above inquiry is rally good, shall time not be counted cause vessel turn on berth was delayed due to slow discharging rate that was caused by bad weather

  3. Hi,
    Shall we count as laytime if NOR has been tendered/accepted, however the weather is raining while vsl wait for cargo ?