Archive for the ‘shipping and transportation’ Category

Demurrage in commodities trade

Released by LT Bill Speaks, COMUSNAVCENT Public Affairs.Demurrage is an important term in commodities trade practice. It is a period when charterer remains in possesion of the vessel after the end of period reserved for loading or unloading of commodity (called laytime). So demurrage implies additional charges for the company who chartered the ship. It is a complex subject, that remains important to the matter of overall freight cost. Contract demurrage is directly binded with a commodity sales contract or a terminalling arrangement. In such contract party assigned, let’s say a buyer of commodity has an obligation to turn a ship (take care of loading or unloading, or both) within the stated time frame (lay time). In case of crude oil trade it is typically a period of 36 hours. In case if these time period (lay time) is exceeded demurrage is being applied. It is calculated based on the formula/rate included in the contract or as a rate specified/linked to recognized published rates. For oil trade and tankers that could be for instance AFRA, Average Freight Rate Assessment that enlists rates in Worldscale terms applicable to key tanker sizes.

This “freight billing” method  is based on the weighted average of independently owned tanker tonnage. The London Tanker Brokers’ Panel assignes rates for various sizes of tankers  for a time of six months starting each January and July. The importance of AFRA in demurrage has been underscored  by the historical legal issues, as for instance a case of Fina Supply Ltd v. Shell UK Ltd. (1991). One party here was nominated to load an oil cargo at Sullom Voe in February 1989.  Sullom Voe  is an oil and liquefied gas terminal located  on the Shetland Islands (Scotland’s jurisdiction) – picture on the right. Demurrage

Under the demurrage provisions in the charterparty, the appropriate rate of demurrage was to be determined by applying the AFRA appropriate to the size of vessel actually used and to the date of presentation of the Notice of Readiness.

Notice of Readiness is a provision that can be found typically in contracts under the parts as “loading conditions” or “lay time and demurrage”.It is an obligation of the buyer to notify the seller (or its representative)  as to when the vessel will be ready to load and when it will arrive at the port of loading.

In the case mentioned vessel’s size was in a range of AFRA which provided a figure of 101.8 per cent as a multiplier to be applied to the specified demurrage rate in the Worldscale demurrage table. That was how the issue of amount of demurrage payment has been resolved.

Second legal form of demurrage (first was called contract demurrage) is a Charter party or CP demurrage – written down in the Charter party as agreed between ship owner and charterer and generally put in as 72 hours for the voyage.
There are instances where shipper uses demurrage to his advantage and profits from the claim. Let’s say vessel takes 40 hours laytime at load port resulting from delays caused by the supplier on shore and  20 hours at unload port. If 36 hours is specified in a supply contract, the shipper may be able to claim 4 hours demurrage from the supplier but not be liable to Charter Party demurrage. That is why sometimes suppliers protect themselves by  inserting a clause limiting their liability to a portion of any CP demurrage incurred and also some suppliers do not want to cover demurrage.

Commodity traders also need to realize  that many charter party demurrage clauses have a time window (typically up to 60 days). So their claim has to be presented in writing within a certain time frame of demurrage incident.

Anoter trap, that an unsuspecting commodity trader may encounter is that companies are incorporating clauses defining payment of demurrage within a specified time after receipt of invoice and documentation. If one forgots about the payment, substantial amounts may accrue with time.

Hence the demurrage remains often a slightly ignored but important issue that can decide about the overall profitability of the transaction.

Physical Trader Blog

FOB Question. Risk transfer in Incoterms 2010 and its previous versions.

commodities fobCaveat emptor et auctor

Caveat emptor /ˌkæviːɑːt ˈɛmptɔr/ Latin for “Let the buyer beware” (from caveat, “may he beware”, the subjunctive of cavere, “to beware” + emptor, “buyer”).

Generally, caveat emptor is the contract law principle that controls the sale of real property after the date of closing, but may also apply to sales of other goods.

One of the most fundamental changes to international trade has passed us by, with hardly any notice by practitioners. Ignorance of this change imposes risks on both buyers and sellers, but it would seem that many are blissfully unaware of this and enter into international sales contracts in this state of ignorance.

I refer to the parts of Incoterms 2010 involving transport of goods by sea. In all previous versions of Incoterms the defining characteristic of the terms used for seafreight, such as FOB, involved the passing of risk at the ship’s rail. This also delineated who would pay the costs involved. When the ICC first introduced this term, they were merely codifying a practice already employed for centuries past, with slight variations in different parts ofthe world. This accepted historical practice also formed the statutory basis for its definition and further interpretation in law by reference to leading legal cases over the centuries.

Incoterms 2010 well and truly overturns this proverbial applecart, whereby the latest definition alters the location of risk and payment for FOB and other seafreight terms. Whereas there is ample legal reference and precedent to pre-2010 Incoterms, the latest version, as far as I know, has yet to be tested in court.

The main risk for international traders, as intimated earlier, lies in ignorance and the all too common error in referring to terms such as FOB without any point of reference such as Incoterms 2000 or Incoterms 2010. If a contract containing a reference to FOB without mention of Incoterms etc, comes under legal scrutiny, how is a judge to determine the intention of the contracting parties, without such reference ? Similarly, if, as often happens, the term used is “FOB Incoterms” or similar, the judge is left with the unenviable task of determining which version applies. As there is now a fundamental difference between Incoterms 2010 and previous versions, this task cannot be taken lightly. Again, due to ignorance, many people assume that the latest version of Incoterms automatically applies, but this is, of course, fallacy, as is the assumption that previous versions of Incoterms cannot be used.

For Incoterms, like insurance, many people do not pay too much heed to the details, until put to the test by litigation etc, by which time it is too late to rectify any errors. If you consider yourself a professional international trader, are you fully aware of the implications of the latest version of Incoterms and have you incorporated this into your standard terms and conditions ?

If the above is true for international contracts, it follows that it is also true for drafting Proforma Invoices and Letters of Credit and is one of the most common errors I find when advising LC clients.

 

Laurence Bacon

Mr. Bacon is a former Director of the National Committee of the International Chamber of Commerce (ICC), founder of the Irish Committee on Banking Techniques, co-founder of the Irish Committee on Customs & Trade and a member of the UCP Consulting Group which worked on the revision of the rules relating to LC’s (UCP 600). Mr. Bacon has over 30 years experience in import/export.

He shares his vast experience providing consulting services. For more please visit exportbureaux.com

Physical Traders: Pipeline transportation

Physical traders 55Natural Gas and Oil pipelines differs much in the operational process, even if they look the same on the outside, perform similar service and are governed by same laws of physics. The installation process remains quiet the same, as well as regulatory and social issues such constructions provoke.

We can generally discern natural gas pipelines, crude oil pipelines and refined product pipelines. They are often governed by different nomenclature during the operational process. At the same time operations of oil pipelines, chemical liquids pipelines, natural gas liquids (NGL) pipelines and liquefied petroleum gas (LPG) pipelines are largely alike. Industry classification also distinguish between Crude oil gathering lines and Crude oil main lines among oil pipelines.

Pipeline value chain we can trace back to the oil patch, where physical oil is extracted from underground reservoirs, either in mixed streams or separately. If the strean at the stage of a wellhead is a mixed stream, field separators at the well sites channel it further as an oil and gas. Oil gathering lines are made from 5 centimeters to 30 centimeters pipe. Starting at the production field tank battery which is an aggregation of smaller tanks and then via pipeline (or even a truck) to so called gathering station, aggregation of larger storage facilities.
The gathering station aggregates is a point in a value chain that mix crude from various sources. It is typically situated by a crude oil main line and has a pump facility to inject the crude oil into the main line. Gathering stations might be situated not only at the beginning but also along the main line. Main lines are build from at least 20 centimeters pipes.

What deserves a remark, when the gathering station is build along a main line and if crude oil injected considerably differs in type from the one already flowing, the pipeline can be stopped upstream and a portion of crude can be injected as a separate batch. Then it is being tracked as it goes and can be delivered to separate customers or segregated storage facilities at the designated destination.

Oil is also delivered to the main lines at regional storage tanks and marine off-loading facilities. At the delivery side, pipelines deliver to the range of facilities as mentioned before (in an incjection point “category”). They are also an important source of deliveries to the refining plants.

Physical crude oil pipeline ends at the point of oil refinery and at the next stage transforms into refined products pipeline value chain which ends subsequently at petroleum products terminals, a gathering of large storage facilities near final product’s consumers concentration.

Find out about physical commodities trading companies.

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Physical Traders: Freight hedging in physical commodities trade

physical trade2Despite the volatile and cyclical nature of shipping industry, the idea of widespread freight hedging as used by commodity traders is relatively new (going back not much more than a decade). Shipping freight derivatives have the potential to limit freight rate risk of the dry-bulk and wet-bulk sectors. The volatility of freight rates, constitutes a major business risk towards  shipowners and charterers (traders). For the party hiring a vessel for transportation, higher freight rates leads to higher costs. For the shipowner, lower freight rates amounts to less profit from hiring out vessels. Hence freight derivatives provide a real benefit to parties involved, making risk management cheaper and more effective, when compared to other traditional methods of limiting the exposure as a time charter, where shipowner was bound to leave ships to the full disposition of a charterer, what prohibited him to profit from any advantegous spot market opportunities and where time charterer had to face operational risks implied by charter party agreement. Hence both commodity traders (as charterers) and shipowners, can focus on their respective domain and at the same time manage the risk through the separate, paper trade market. This solution is also more cost effective because of the relatively low fees charged by brokers on this market (when compared to shipbrokers) and the easiness of getting out of position when compared to leaving a physical position. Naturally in paper freight hedging there is no physical settlement, the difference on the taken positions is paid out in cash.

For dry-bulk market voyage-based contracts are settled on the difference between the contracted price and the average prevailing value of the route selected in the index over the last seven working days of the settlement month. Time-charter-based contracts are settled on the difference between the contracted price and the average index value over the calendar settlement month. For tankers settlement takes place at the end of the month where the fixed forward price is compared against the monthly average of the spot price of the tanker route selected.

Not only trading houses, employ freight hedging as a tool, but also oil refineries, when taking into consideration their cash-flow management. However according to different sources commodities trading companies occupy up to 40 % of the whole market, so even more than pure financial players. Market participants have to disposition following types of products: OTC and cleared freight forwards, exchange-based freight futures (traded on NYMEX and Oslo based IMAREX) OTC or cleared freight options. So let’s speak a little bit about forwards. Forward Freight Agreement (FFA) are Contracts for Difference between a seller and a buyer to settle a freight rate, for a specified quantity of cargo or type of vessel for one or a combination of the major trade routes of the dry-bulk or tanker sectors. FFAs are custom made what only increases their popularity. In case of FFA as in case of other OTC instruments parties are bound to accept their credit risk. The facilitators are major shipbrokers and financial entities (icluding investment banks). Once again, what is worthwile to remember, OTC gives a lot of flexibility to participants, to draw contracts according to their changing needs and changing business environment. Indices comprising freight rates and reflecting their fluctuation across dry bulk spot voyage and time-charter rates are being used as underliers in FFAs. Here we speak of Baltic Panamax Index, Baltic Capesize Index, Baltic Supramax Index and Baltic Handysize Index. In case of wet bulks underlying indices are: Baltic Dirty Tanker Index and the Baltic Clean Tanker Index. Routes included in the indices are numbered. Vessel size, cargo, route description and weight assigned to the route reflecting its importance in freight market at time of construction of the index are specified. Vessel size is measured in deadweight tonnes and comprises of cargo, bunker, lubricants, water, food and crew. Shipowner is paid in case of voyage charter in US dollars per ton, to get a cargo for a trader from point A to point B. Time-charters are paid in US dollars per day, shipowner is paid every month or twice a month. He operates the vessel under direct instructions from the charterer.

Find out about physical commodities trading companies.

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