Chartering and Operation

Introduction to Chartering Dec 2009

Agenda • Demand and Supply • Cost Elements in Shipping • The market Participants p • Different ways of Chartering • Concluding a Fixture • Risk Management / Freight Derivatives

Demand and Supply

Costs Elements in Shipping • Voyage Costs • Operating and Daily Running Costs • Capital Costs

Voyage Costs • Bunkers (Contracts/hedging/speed/fluctuations)

• Port (Wharfage/Linesmen/Harbour dues/Light dues/Towage/Pilot)

• Canal ( (Suez/Panama/Kiel....) / / l )

• Other Voyage Costs (Cleaning/Taxes/War Insurance/Surveyors)

• Commission ((Broker commission/Address commission))

Operating/Daily Running Costs • Crew (All direct and indirect charges)

• Stores and Miscellaneous (Spare parts/Lubricants/Water/General Stores)

• Insurance (H&M and P&I...)

• Repair and Maintenance (Spares/Surveys/Dry Dock...)

• Administration Costs (Chartering/Operation/Technical/Crewing/ Finance and Accouning –all shore based)

C i l Costs Capital C • Size of Loan • Repayment Period • Interest Rate

Th Market The M k t Participants P ti i t • Owners • Charterers • Brokers

Charterer

Charterparty

Charterer’s broker

Owner s Owner’s broker

Owner

Owners The Owner is the vessel controller: • • • •

Head Owner Disponent Owner/Operator Commercial Manager (Cargo Owners)

Types of Vessels Categorized by size – – – – – – – – –

ULCC VLCC Suezmax Af Aframax/LR/Capesize /LR/C i Panamax MR /Handy Size GP/SR/Small Handy Size Coaster Barge

> 315,000 MT 275,000 MT 130,000-160,000 MT 90 000 120 000 MT 90,000-120,000 50.000-84,000 MT 30 000 40 000 MT 30,000-40,000 20,000-30,000 MT 10 000 MT 10,000 1,000 – 3,000 MT

Charterers The Charterer is the cargo controller: • Producer/Receiver – Selling CIF – Buying FOB • Traders • (Shipowners)

Brokers • Exchange of information (market/competition/fixtures)

• Network (personal relationships...?)

• Intermediary (Negotiating/knowledge)

• Paperwork (Recaps/Charterparties)

• Operations (ETA’s/times/demurrage...)

• Exclusive/Semi Exclusive/Comptitive / p • Specialised (Segments/commodity/ship sizes)

• Range of Services (Reports,...)

Different Ways of Chartering • Voyage Charter • Time Charter • Bareboat Charter

Voyage Charter • Transport cargo from A to B • Charterer pays freight • Owners pays all voyage related costs – Single Voyage (all space/part space) – Consecutive Voyages – Contract of Affreightments (CoA)

Time Charter • • • • •

Hire a vessel Agreed period Description of ship Cargo and trading exclusions per day/month y/ or p per dwt in Usd Hire p

(paid in advance)

• Chartererer p pays y all voyage y g related costs

Bareboat Charter • Hire an ”empty” vessel • Long period (Purchase option)

• Description of ship • Cargo and trading exclusions • Hire per day or per dwt in Usd (paid in advance)

• Chartererer has commercial and technical responsibility ibilit and d pays allll daily d il running i costs t as well as all voyage related costs

Tanker Chartering g • Voyage Charter • Voyage Charter – Low risk – Low risk

• Time Charter – Medium risk

• Time Charter – Medium risk

• Demise or Bare Boat Charter HighBoat risk Charter • –Bare – High Hi h risk i k

• Single voyage (spot) charters • Consecutive voyages • COA (Contract of Affreightment) • Charterer hires vessel for an agreed period and pays for variable costs including bunkers, port costs, canal tolls • Charterer hires ‘empty’ vessel for a (long) period. Has to provide id and d pay for f allll costs t including crew, insurance, drydocking and maintenance plus variable costs

Cost Distribution

Employment Type Costs

Bare Boat Time Charter Voyage Charter

Capital Costs

Owner

Owner

Owner

Daily Running Costs

Charterer

Owner

Owner

Voyage Costs

Charterer

Charterer

Owner

Ch t Charterparty t F Forms Voyage Charter • Dry (Amwelsh, Gencon,Polcoalvoy, Baltimore Berth Grain,, Welcon)) • Tanker (Asbatankvoy, Exxonvoy,BP Voy, Shellvoy,...) Time Charter (NYPE 93, Shelltime,BP Time,..) Bareboat Charter (B (Barecon,..) ) Always with reference to a dated charterparty

C Concluding l di a Fixture Fi t • Voyage Calculation • Negotiations – Indication – Firm offer

Example p Voyage y g Calculation

Indication We are pleased to indicate as follows: • • • • • •

Vessel: Bow Sky/oos Laycan: Nov 10-20 Cargo: 10,000 10 000 mts biodiesel from Houston to Rotterdam Freight: Usd 45,50 pmt D Demurrage: U Usd d 35,000 35 000 pdpr d Laytime: 350/350 mtph l/d shinc rev

Firm Offer 1. Reply time 2. Subjects 3. Name of Charterer/Owner 4 Vessel name 4. name, short description 5. Laycan (laydays/cancelling) 6. The cargo g – full description p 7. Load port(s) berth(s) 8. Discharge port(s) berth(s) 9. Freight 10. Payment of freight 11 Demurrage/Despatch 11. 12. Laytime 13. Commission 14. Charterparty Form/Terms

Risk Management / Freight Derivatives • Risk Managment in Shipping • Worldscale • Freight Market Volatility • FFAs • Options

Risk Management g in Shipping pp g • Risk in Shipping • Operational Risk (Freight, Revenue, Cost and Expenses) • Ownership Risk (Price Fluctuations Fluctuations, Accidents and Losses)

• Traditional Hedging • Time Charter, Bareboat Charter, CoA

• Introduction of Freight g Derivatives • BIFFEX • FFAs • Options

Worldscale (WS) ( ) • New Worldwide Tanker Nominal Freight Scale (Worldscale) = annual publication listing $/MT for voyage between 2 ports. • WS rate - % applied to flat rate to calculate the $/MT rate for specific voyage between 2 ports ports. Flatt R Fl Rate t x WS R Rate t = $/t $/tonne rate t eg 5.40 x W150/100 = $8.10/MT

Worldscale Components: • Standard Vessel • Average service speed • Bunker consumption p • Port time • Fixed Hire Element • Port costs - In USD converted from local currency rates • Canal Transit Time – Panama and Suez • Bunker Price

04/07/2008

04/05/2008

04/03/2008

04/01/2008

04/11/2007

04/09/2007

04/07/2007

04/05/2007

04/03/2007

04/01/2007

04/11/2006

04/09/2006

04/07/2006

04/05/2006

04/03/2006

04/01/2006

04/11/2005

04/09/2005

04/07/2005

04/05/2005

04/03/2005

04/01/2005

U US$/t

Spot volatility - TD5 TA Route.

350

300

250

200

150

100

50

Growth in FFA trading: Volume of tanker FFAs fixed

400

million tonnes m

350 300 250

participants 20% owners 50% oil co/traders 30% financials

200 150 100 50 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Data Source: FFABA

Wh t is What i a Forward F d Freight F i ht Agreement? A t? An FFA is a Swap • Principal to Principal contract with a buyer and a seller • An agreement today to buy or sell a freight rate at a certain level for a defined period in the future future. • To settle at a future date at a price based on freight assessments taken during the settlement period . • Based on a defined voyage or time charter. • Over Over-The-Counter The Counter or Cleared.

Why use FFAs? HEDGE • manage g freight g exposure p & cash flow

SPECULATE

• flexibility fl ibilit & ability bilit to t reactt swiftly to spot market volatility (rather than time charter)

• Cash settled

• trade-out of contracts prior to settlement

• High Volatility • Clearing available • FSA regulated

The FFABA Forward Curve •FFAs FFAs need to be “marked marked to market” market during their life time. •Cleared trades need to be margined margined. •OTC positions need to be monitored for internal reporting reporting. •The Forward Freight Agreement Brokers A Association i ti (FFABA) members b reportt their th i daily d il assessments along the curve to the Baltic. •The Baltic publish the average prices daily.

O ti Options - definition d fi iti An Option gives the buyer the right but not the obligation to take an underlying position. Example. Example You buy a Call Option (The right to buy) P’Max Av 4 TC Cal ‘08 27000 Call Cost $1000 per day. Result. If the market goes above 27000 a day in ‘08 you have all the profit, once your cost of 1000 is covered. If the Market Falls you only lose your 1000 a day.

Options Call Option = Option To Buy Put Option = Option To Sell Premium = Price Paid For Option Strike Price = Level Option Set At Breakeven = Level at which premium is covered Long = Buy Short = Sell p Seller Grantor = Option

Th k you for Thank f the th attention tt ti