Decision Whether To Time Charter Or Voyage Charter Ship

Voyage charter is favored by the trader with the ‘one off’ cargo or by the utility company or steel company who need to supplement a fleet of owned or time-chartered ships. Voyage chartering is also used by traders who ship ‘speculative’ cargoes; these are cargoes where the final destination has not been fixed. The trader loads a cargo for a port or range of ports. When the cargo has been loaded and the ship has left the loading port, the trader sells the cargo; under this system, a cargo may change hands several times during a voyage. It is important therefore that all the terms agreed upon during the chartering fix- ture are clearly spelt out so that the eventual buyers of the cargo, who were not involved in the original negotiations, will understand their responsibilities under both the charterparty and the bill of lading. With a voyage charter, the owner undertakes to carry a cargo for a single voyage. At the end of the voyage, the ship is available to carry other cargoes and the owner has no assurance of further employment. The expectation is that the extra risk of the voyage charter will produce higher rewards, although it does not always happen in practice. The consequence of these expectations and the owners’ and charterers’ behavour is that the freight rates on the voyage charter markets are extremely volatile and the earnings per day for a ship can double or halve within a short period, frequently within less than six months. To avoid this volatility, traders may use period time charters as a means of controlling costs, as they are protected from the freight rate fluctuations which are a feature of ‘spot’ market trading. The shipowner may also prefer period time charters for the greater security, which comes from knowing that the ship has secure and profitable employment for a known period of time which may be as long as several years. Time charters may be used as part of the security for bank loans when financing a ship. The second-hand price of a ship varies according to the freight rates, so she is not considered sufficient security for the loan. Bankers like the secure earnings that a period time charter with a reputable charterer provides when advancing loans to finance a ship, even if the time charter does not extend for the full period of the loan. It is possible to design a ship financing package to bridge the gap between current freight rates and the high capital costs of new ships using both time and demise charters. The decision on how to charter a ship is also based on the market perception of future freight rates. When rates are low and likely to rise, owners will be looking for short-term contracts in order to leave their ships free in order to obtain more profitable employment when the rates have risen. In this situation, owners will therefore not accept time charters other than trip charters, unless they are above the current spot market rate, something which the charterers are not likely to concede. Conversely, when rates are high and the perception is that they are likely to fall, owners will seek period time charters, to retain the higher earnings for as long as possible, while the charterers want to keep their contracts as short as possible. Thus period time charters are only seen when the market is in a relatively stable position and both parties are willing to enter into long-term contracts.