Skip to content
Commodities Demystified

Shipping & Chartering

Shipping is the critical link that enables global commodity trade. For most bulk commodities, ocean freight is the largest logistics cost component. Understanding the shipping market is essential for any physical commodity trader.

The Shipping Market

Market Structure

SegmentVessel TypesCommoditiesMarket Size
TankerVLCC, Suezmax, Aframax, MRCrude, products~600M DWT
Dry BulkCapesize, Panamax, SupramaxIron ore, coal, grain~900M DWT
GasLNG, LPG carriersNatural gas, propane~100M DWT
ContainerVarious sizesGeneral cargo~300M TEU

Key Players

RoleFunctionExamples
ShipownersOwn vesselsEuronav, Frontline, Star Bulk
CharterersHire vesselsCommodity traders, oil majors
ShipbrokersMatch supply/demandClarksons, SSY, Braemar
OperatorsManage vessels for ownersV.Ships, Anglo-Eastern

Tanker Market

Vessel Classes

ClassSize (DWT)CapacityTypical Routes
VLCC200,000-320,0002M bblME→Asia, WAF→Asia
Suezmax120,000-200,0001M bblWAF→Europe, short ME
Aframax80,000-120,000600K bblRegional, lightering
Panamax60,000-80,000500K bblAmericas, Caribbean
MR (Medium Range)25,000-55,000300K bblClean products
LR155,000-80,000500K bblLong-haul products
LR280,000-120,000750K bblLong-haul products

Worldscale System

WORLDSCALE PRICING
──────────────────


Worldscale (WS) is a percentage of a reference rate:


Flat Rate: Published $/MT for each route
Market Rate: WS% × Flat Rate


EXAMPLE:
Route: ME Gulf → Japan
Flat Rate: $10.00/MT
Market: WS 60


Actual Freight = 60% × $10.00 = $6.00/MT


CONVERSION TO $/BBL:
Crude: ~7.3 bbl/MT (varies by grade)
$6.00/MT ÷ 7.3 = $0.82/bbl


Note: WS 100 is the historical "breakeven" rate
WS > 100 = Strong market
WS < 100 = Weak market

Tanker Time Charter Equivalent (TCE)

TCE CALCULATION
───────────────


TCE = Net Voyage Revenue / Voyage Days


Net Voyage Revenue = Freight - Voyage Costs
Voyage Costs = Bunkers + Port Costs + Canal Fees


EXAMPLE:
Freight: $4,000,000
Bunkers: $800,000
Port costs: $200,000
Canal (Suez): $500,000
─────────────────────
Net revenue: $2,500,000


Voyage days: 50
TCE: $2,500,000 / 50 = $50,000/day


Compare to: Time charter rate for similar vessel
If TC rate < TCE, voyage charter is better

Dry Bulk Market

Vessel Classes

ClassSize (DWT)Key CargoesTypical Routes
Capesize100,000-200,000Iron ore, coalAustralia/Brazil→Asia
Panamax60,000-100,000Grain, coalUS Gulf→Asia, Black Sea
Supramax50,000-60,000Grain, fertilizerEmerging markets
Handysize15,000-35,000Minor bulksShort-haul, small ports

Baltic Indices

IndexMeasurementKey Routes
BDIBaltic Dry IndexOverall dry bulk market
BCIBaltic Capesize IndexCapesize routes
BPIBaltic Panamax IndexPanamax routes
BSIBaltic Supramax IndexSupramax routes

Dry Bulk TCE

DRY BULK TCE EXAMPLE
────────────────────


PANAMAX: Brazil → China (Iron Ore)


Freight: $25/MT × 70,000 MT = $1,750,000
Bunkers: 35 days × 35 MT/day × $600/MT = $735,000
Port costs: $150,000
─────────────────────────────────────────
Net revenue: $865,000


Voyage days: 40
TCE: $865,000 / 40 = $21,625/day


Compare to: Panamax TC rate
If market is $18,000/day → Voyage is attractive
If market is $25,000/day → TC is better

Charter Party Types

Voyage Charter

VOYAGE CHARTER STRUCTURE
────────────────────────


Owner provides:
- Vessel
- Crew
- Insurance
- Bunkers


Charterer provides:
- Cargo
- Loading/discharge instructions


Payment:
- Freight per MT or lumpsum
- Demurrage/dispatch


Key Terms:
- Laycan (loading window)
- Laytime (allowed loading days)
- Demurrage rate (penalty for delays)
- NOR (Notice of Readiness)

Time Charter

TIME CHARTER STRUCTURE
──────────────────────


Owner provides:
- Vessel
- Crew


Charterer provides:
- Bunkers
- Port costs
- Voyage instructions


Payment:
- Daily hire rate
- Typically 30-day advance


Duration:
- Period (months to years)
- Trip (specific voyage)


Key Terms:
- Off-hire (vessel unavailable)
- Speed/consumption warranty
- Trading restrictions

Contract of Affreightment (COA)

COA STRUCTURE
─────────────


Agreement to transport specified quantity
over specified period


EXAMPLE:
Volume: 1 million MT/year
Period: 3 years
Routes: Brazil → China
Frequency: Monthly shipments


BENEFITS:
Charterer: Guaranteed capacity, often better rates
Owner: Revenue visibility, fleet planning


PRICING:
Can be fixed rate, index-linked, or formula

Chartering Process

Voyage Chartering Workflow

CHARTERING TIMELINE
───────────────────


T-14: Trading desk confirms cargo requirement
T-12: Operations issues chartering brief to broker


      Brief includes:
      - Cargo type and quantity
      - Load port and laycan
      - Discharge port(s)
      - Special requirements


T-10: Broker circulates requirement to owners
T-8:  Owners submit offers


      Offer includes:
      - Vessel name and specs
      - Position and ETA
      - Freight rate
      - Terms and conditions


T-6:  Negotiate with preferred vessels
T-4:  Fix vessel "on subjects"


      Subjects:
      - Cargo confirmation
      - Shipper approval
      - Receiver approval
      - L/C issuance


T-2:  Lift subjects
T-1:  Charter party signed
T-0:  Vessel presents at load port

Negotiation Points

PointCharterer PositionOwner Position
RateLowerHigher
LaycanFlexibleTight
DemurrageLower rateHigher rate
SpeedFasterSlower (fuel savings)
Port restrictionsNoneLimit risky ports
Weather clauseIncludeExclude

Freight Rate Factors

Rate Determinants

FactorImpactMechanism
Tonnage supplyMajorFleet size, newbuilds, scrapping
Cargo demandMajorTrade volumes, seasonality
Bunker priceSignificantFuel is major cost
Port congestionModerateTies up vessels
SeasonalityModerateHarvest, weather
GeopoliticsVariableSanctions, route changes

Bunker Cost Impact

BUNKER COST CALCULATION
───────────────────────


VLCC: 45-day voyage


Consumption:
Laden: 100 MT/day × 20 days = 2,000 MT
Ballast: 90 MT/day × 20 days = 1,800 MT
Port: 10 MT/day × 5 days = 50 MT
─────────────────────────────────────
Total: 3,850 MT


At $600/MT: $2,310,000
At $400/MT: $1,540,000


Savings: $770,000 per voyage
This is why bunker hedging matters!

Demurrage and Dispatch

Understanding Laytime

LAYTIME CALCULATION
───────────────────


Charter party terms:
Loading rate: 12,000 MT PWWD SHEX
(Per Weather Working Day, Sundays Holidays Excepted)


Cargo: 100,000 MT
Allowed laytime: 100,000 / 12,000 = 8.33 days


NOR tendered: Monday 06:00
Laytime starts: Monday 06:00 (if accepted)


Exclusions:
- Sundays: Not counted
- Holidays: Not counted
- Bad weather: Not counted


Actual loading: 10 days
Used laytime: 8 days (after exclusions)
Status: On demurrage for 0.67 days

Demurrage Example

DEMURRAGE CALCULATION
─────────────────────


Demurrage rate: $40,000/day


Loading:
Allowed: 4 days
Used: 5 days
Demurrage: 1 day × $40,000 = $40,000


Discharge:
Allowed: 4 days
Used: 6 days
Demurrage: 2 days × $40,000 = $80,000


Total demurrage: $120,000


WHO PAYS?
- FOB: Buyer pays discharge demurrage
- CIF: Seller pays both (usually)
- Contract specific allocation

Dispatch (Despatch)

DISPATCH CALCULATION
────────────────────


Dispatch rate: 50% of demurrage = $20,000/day
(Industry standard is half demurrage)


Loading completed early:
Allowed: 4 days
Used: 3 days
Dispatch: 1 day × $20,000 = $20,000 earned


INCENTIVE: Fast operations = financial benefit

Risk Management

Freight Risk Hedging

InstrumentDescriptionUse
FFA (Forward Freight Agreement)OTC derivative on freight indicesHedge future freight
Freight futuresExchange-tradedStandardized hedging
Bunker swapsFix fuel costHedge bunker exposure

FFA Example

FFA HEDGING
───────────


EXPOSURE:
Need to charter Capesize in 3 months
Worried about rate increase


HEDGE:
Buy FFA: 3-month Capesize @ $20,000/day


OUTCOME:
If market rises to $25,000/day:
Physical charter: $25,000/day (higher cost)
FFA gain: $5,000/day
Net cost: $20,000/day ✓


If market falls to $15,000/day:
Physical charter: $15,000/day (lower cost)
FFA loss: $5,000/day
Net cost: $20,000/day


HEDGED: Rate locked at $20,000/day

Key Takeaways

  1. Freight is a major cost — Can make or break trade economics
  2. Market is cyclical — Rates can move 2-3x within a year
  3. Vessel class matters — Size impacts cost and port access
  4. Charter type choice — Voyage vs TC depends on needs
  5. Demurrage adds up — Efficient ops = lower costs
  6. Hedging is available — FFAs for freight, swaps for bunkers

References

  • Baltic Exchange
  • Clarksons Research
  • BIMCO Charter Party Forms
  • Worldscale Association
  • SSY Shipping Review