Bunker Hedging

EDUSCAN ACDAMIC & TRAINING CENTRE

PROJECT ON Bunker Hedging Completing my MBA in Banasthali University India

Submitted by

Usman Khalanthar 2008

CONTENTS

Pages

1. Introduction

4



History



Nature of shipping industry

2. Chartering 

Cargo Ship chartering



Types of chartering



Vessel types

3. Dry Bulk Carriers 

Cargo ship



Charter Party

4. Implementing Hedging Technique on bunkering 

Contract of affriegtment



Maritime Fuel



Implementing hedging Technique on COA



Analyzing with example

5. Conclusion

11

16

24

29

2

INTRODUCTION

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The industry devoted to moving goods or passengers by water. Passenger operations have been a major component of shipping, but air travel has seriou sly limited this aspect of the industry. The enormous increase, however, in certain kinds of cargo, for example, petroleum, has more than made up for the loss of passenger traffic. Although raw materials such as mineral ores, coal, lumber, grain, and other foodstuffs supply a vast and still growing volume of cargo, the transportation of manufactured goods has increased rapidly since World War II.

 HISTORY Commercial shipping began perhaps with the activities of the Phoenician merchants who operated their own vessels, transporting goods in the Mediterranean. The practices they developed were adopted by the merchants of ancient Greece and Rome and were continued by the maritime powers through the middle Ages to modern times. The Venetians, from 1300 to 1500, owned a huge merchant fleet that served the interests of the merchant traders and the city -state exclusively. From 1600 to 1650 the Dutch ranked first in shipping activity, operating a globecircling tramp service for merchants of Western Europe. Advances in the 19th Century. Until the 19th century, ships were owned by the merchant or by the trading company; common-carrier service did not exist. On Jan. 5, 1818, the full-rigged American ship James Monroe, of the Black Ball Line, sailed from New York City for Liverpool, inaugurating common-carrier line service on a dependable schedule. A policy of sailing regularly and accepting cargo in less-than-shipload lots enabled the Black Ball Line to revolutionize shipping. Two technological

developments furthered progress toward present-day

shipping

practices: the use of steam propulsion and the use of iron in shipbuilding. In 1819 the American sailing ship Savannah crossed the Atlantic under steam propulsion for part of the voyage, pioneering the way for the British ship Sirius, which crossed the Atlantic entirely under steam in 1838. Iron was first used in the sailing vessel Ironsides, which was launched in Liverpool in 1838. The opening of the Suez Canal in 1869 was of great economic importance to shipping. Coinciding with the perfection of the triple-expansion reciprocating engine, which was both

4

dependable and economical in comparison with the machinery of the pioneer vessels, the completion of the canal made possible rapid service between Western Europe and Asia. The first steam-propelled ship designed as an oceangoing tanker was the Glückauf, built in Great Britain in 1886. It had 3020 deadweight tons (dwt; the weight of a ship's cargo, stores, fuel, passengers, and crew when the ship is fully loaded) and a speed of 11 knots.

The 20th Century. Among the technological advances at the turn of the century was the development by the British inventor Charles A. Parsons (1854–1931) of the compound steam turbine, adapted to maritime use in 1897. In 1903 the Wandal, a steamer on the Volga River, was powered by the first diesel engine used for ship propulsion. The Danish vessel Selandia was commissioned as the first seagoing motor ship in 1912. After World War I significant progress was made especially in the perfection of the turboelectric drive. During World War II, welding in ship construction supplanted the use of rivets. The keel of the first nuclear-powered passenger-cargo ship, the Savannah, was laid in Camden, N.J., on May 22, 1958, and the ship was launched in 1960. In 1962 it was chartered to a private company for experimental commercial use, but it did not prove financially successful.

 NATURE OF THE SHIPPING INDUSTRY Shipping is a private, highly competitive service industry. The activity of the industry is divided into several categories, namely, liner service, tramp shipping, industrial service, and tanker operation, all of which operate on certain well-established routes.

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Trade Routes. Most of the world's shipping travels a relatively small number of maj or ocean routes: the North Atlantic, between Europe and eastern North America; the Mediterranean-Asian route via the Suez Canal; the Panama Canal route connecting Europe and the eastern American coasts with the western American coasts and Asia; the South African route linking Europe and America with Africa; the South American route from Europe and North America to South America; the North Pacific route linking western America with Japan and China; and the South Pacific route from western America to Australia, New Zealand, Indonesia, and southern Asia. The old Cape of Good Hope route pioneered by Vasco da Gama and shortened by the Suez Canal has returned to use for giant oil tankers plying between the Persian Gulf and Europe and America. Many shorter routes, including coastal routes, are heavily traveled. Coastwise Shipping. Technically, coastal shipping is conducted within 32 km (within 20 mi) of the shoreline, but in practice ship lanes often extend beyond that distance, for reasons of economy and safety of operation. In the U.S., coastal shipping is conducted along the Pacific, Atlantic, and Gulf coasts. Under the restriction known as cabotage, the U.S. and many other nations permit only vessels registered under the national flag to engage in coastal trade. Among many small European countries cabotage does not apply, and short international voyages are common. A special feature of coastal shipping in the U.S. is the trade between the Pacific coast and the Atlantic and Gulf coasts. Vessels engaged in this trade traverse the open sea and utilize the Panama Canal; however, they are covered by cabotage laws. In coastal and short-distance shipping, specialpurpose ships are often employed, such as car ferries and train ferries. Inland Waterways. A major part of all the world's shipping moves on inland waterways—rivers, canals, and lakes. Usually such shipping employs smaller, lighter vessels, although in some cases oceangoing ships navigate inland waterways, for example, the Saint Lawrence Seaway route to the Great Lakes of North America. Containerization, lighter-aboard-ship, and barge-aboard-ship operations

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have facilitated the shipping of cargoes between oceangoing vessels and those of the inland waterways. Liner Service. Liner service consists of regularly scheduled shipping operations on fixed routes. Cargoes are accepted under a bill-of-lading contract issued by the ship operator to the shipper. Competition in liner service is regulated generally by agreements, known as conferences, among the shipowners. These conferences stabilize conditions of competition and set passenger fares or freight rates for all members of the conferences. In the U.S., steamship conferences are supervised by the Federal Maritime Commission in accordance with the Shipping Act of 1916. Rate changes, modifications of agreements, and other joint activities must be approved by the commission before they are effective. Measures designed to eliminate or prevent competition are prohibited by law. Tramp Shipping. Tramps, known also as general-service ships, maintain neither regular routes nor regular service. Usually tramps carry shipload lots of the same commodity for a single shipper. Such cargoes generally consist of bulk raw or low-value material, such as grain, ore, or coal, for which inexpensive transportation is required. About 30 percent of U.S. foreign commerce is carried in tramps. Tramps are classified on the basis of employment rather than of ship design. The typical tramp operates under a charter party, that is, a contract for the use of the vessel. The center of the chartering business is the Baltic Exchange in London, where brokers representing shippers meet with shipowners or their representatives to arrange the agreements. Freight rates fluctuate according to supply and demand: When cargoes are fewer than ships, rates are low. Charter rates are also affected by various other circumstances, such as crop failures and political crises. Charter parties are of three kinds, namely, the voyage charter, the time charter, and the bareboat charter. The voyage charter, the most common of the three, provides transport for a single voyage, and designated cargo between two ports in consideration of an agreed fee. The

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charterer provides all loading and discharging berths and port agents to handl e the ship, and the shipowner is responsible for providing the crew, operating the ship, and assuming all costs in connection with the voyage, unless an agreement is made to the contrary. The time charter provides for lease of the ship and crew for an agreed period of time. The time charter does not specify the cargo to be carried but places the ship at the disposal of the charterer, who must assume the cost of fuel and port fees. The bareboat charter provides for the lease of the ship to a charterer who has the operating organization for complete management of the ship. The bareboat charter transfers the ship, in all but legal title, to the charterer, who provides the crew and becomes responsible for all aspects of its operation. The leading tramp-owning and tramp-operating nations of the world are Norway, Great Britain, the Netherlands, and Greece. The carrying capacity of a typical, modern, well -designed tramp ship is about 12,000 dwt, and its speed is about 15 knots. The recent trend is toward tramps of 30,000 dwt, without much increase in speed. Industrial Carriers. Industrial carriers are vessels operated by large corporations to provide transportation essential to the processes of manufacture and distribution. These vessels are run to ports and on schedules determined by the specific needs of the owners. The ships may belong to the corporations or may be chartered. For example, the Bethlehem Steel Corp. maintains a fleet of Great Lakes ore carriers, a number of specialized ships that haul ore from South America to Baltimore, Md., and a fleet of dry-cargo ships that transports steel products from Baltimore to the Pacific coast. Many oil companies maintain large fleets of deep-sea tankers, towboats, and river barges to carry petroleum to and from refineries. Tanker Operation. All tankers are private or contract carriers. In the 1970s some 34 percent of the world tanker fleet, which aggregates about 200 million dwt, was owned by oil companies; the remaining tonnage belonged to independent shipowners who chartered their vessels to the oil companies. So-called supertankers, which exceed 100,000 dwt, are employed to transport crude petroleum

8

from the oil fields to refineries. The refined products, such as gasoline, kerosene, and lubricating oils, are distributed by smaller tankers, generally less than 30,000 dwt, and by barges.

9

CHARTERING

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Chartering (Shipping) In some cases a charterer may own cargo and employs a shipbroker to find a ship to deliver the cargo for a certain freight rate. Freight rates may be on a per-ton basis over a certain route (e.g. for iron ore between Brazil and China) or alternatively may be expressed in terms of a total sum - normally in U.S. dollars - per day for the agreed duration of the charter. A charterer may also be a party without their own cargoes who takes a vessel on charter for a specified period from the owner and then trades the ship to carry cargoes at a profit to the hire rate, or even makes a profit in a rising market by re-letting the ship out to other charterers. Depending on the type of ship and the type of charter, normally a standard contract form called a charter party is used to record the exact rate, duration and terms agreed between the shipowner and the charterer. Chartering types as follows. 1. Time charterer 2. Voyage charterer 3. Period charterer 4. Bareboat charterer

1. Time chartering: It is hiring of a vessel for a specific amount of time; the owner still manages the vessel, but the charterer selects the ports and directs the vessel where to go. The Charterer pays for all fuel the vessel consumes, port charges and a daily 'hire' to the owner of the vessel.

2. Voyage charterer It is the charter or hiring of a vessel and crew for a voyage between a load port and a discharge port. The Charterer pays the vessel owner on a per-ton or lump-sum basis. The vessel owner pays the port costs (excluding stevedoring), fuel costs and crew costs.

3. Period charterer

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4. Bare Boat chartering It is an arrangement for the hiring of a vessel, whereby no administration or technical maintenance are included as part of the agreement. The Charterer pays for all operating expenses, including fuel, crew, port expenses and hull insurance. Usually, the Charter period (normally years) ends with the Charterer obtaining title (ownership) in the hull. Effectively, the Owners are financing the purchase of the vessel.

5. Demise Chartering It Demise charter shifts the control and possession of the vessel; the charterer takes full control of the vessel along with the legal and financial responsibility for it.

 VESSEL TYPES Merchant ships are classified as passenger carriers, cargo ships, and tankers. During t he height of passenger travel by ship, the largest as well as the most glamorous ships afloat were the famed liners of the North Atlantic, which, beginning in the mid-19th century, sailed regular schedules between the Americas and Europe. Competing in speed as well as in size and appointments, such ships as the Cunard's Mauretania 2 (1939–65), Queen Mary (1936; a hotel and tourist attraction since 1967, docked in Long Beach, Calif.), and Queen Elizabeth (1938–68), as well as the United States, (built in the U.S. in 1940s and used as a military vessel and a luxury liner, moored in Philadelphia since 1996) and the French Line passenger ship, the France (1960, sold and renamed Norway in 1979, retired in the 2000s), gradually reduced the time for the North Atlantic crossing to less than four days. Their size, from about 45,000 to 75,000 metric tons and up to 305 m (1000 ft) in length, was gigantic by the standards of the first half of the 20th century , but they have been dwarfed by the oil tankers of the 1970s and '80s. Today's passenger liners operate principally in the cruise trade. At the beginning of the 21st century there was revived interest in ocean travel. Setting a new standard for size, weight, and elegance, the Cunard's newest flagship, the Queen Mary 2, is the largest (151,400 tons), longest (345 m/1132 ft), tallest (72 m/236 ft), widest (41 m/135 ft), an d

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most costly ($800 million) liner ever built. It set out on her first voyage in 2004, with a planned schedule of 12 trans-Atlantic crossings in 2004 and 26 crossings in 2005; the latter number is double the number of crossings made by her sister ship, the Queen Elizabeth 2 (1968, retired in 2004). Cargo Ships. Cargo ships carry packaged goods, unitized cargo (cargo in which a number of items are consolidated into one large shipping unit for easier handling), and limited amounts of grain, ore, and liquids such as latex and edible oils. A few passengers are accepted on some cargo liners. Specialized ships are designed and built to carry certain types of cargo, for example, automobiles or grain. Container Ships. In the late 1950s container ships set the pattern for technological change in cargo handling and linked the trucking industry to deep-sea shipping. These highly specialized ships carry large truck bodies and can discharge and load in one day, in contrast to the ten days required by conventional ships of the same size. The rapid development of the container ship began in 1956, when Sea-Land Service commenced operations between New York City and Houston, Tex. Barge-aboard, or lighter-aboard, ships, also called seabees (sea barges) or LASH (lighter-aboard ships), resulted from an evolutionary development of the containership. They are capable of carrying about 38 barges, or up to 1600 containers, or a combination of containers and barges. Their design enables them to deliver cargo to developed or undeveloped ports, without the need for berthing. Tankers. Tankers, designed specifically to carry liquid cargoes, usually petroleum, have grown to many-compartmented giants of a million metric tons and more. Despite their great size, their construction is simple, as is, for the most part, their operation. A major problem with the giant tankers is the severe environmental damage of oil spills, resulting from collision, storm damage, or leakage from other causes.

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Specialized tankers transport liquefied natural gas (LNG), liquid chemicals, wine, molasses, and refrigerated products. Treaties and Conventions. Many treaties and conventions have been adopted over the years with the objective of increasing the safety of life at sea. One of the most important agreements provided for the establishment of the International Iceberg Patrol in 1913, after the Titanic disaster. Under the International Load-Line Convention of 1930, ship loading was regulated on the basis of size, cargo, and route of the vessel. The International Convention for the Safety of Life at Sea, which governs ship construction, was ratified by most maritime nations in 1936, and updated in 1948, and again in 1960 and 1974.

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DRY BULK CARRIERS

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Dry Bulk Carriers (Cargo Ship) Here are a few notes on the characteristics of a typical cargo ship of just after 1945, and things have probably not changed greatly. The terms are often very confusing if you are not familiar with them, so I have explained them as best I can. There are some variations, but I have chosen what appears to be the most common practice. The technical information is taken from Kent's handbook. The knot is a unit of speed, one nautical mile (6080.22 ft) per hour. Multiply speed in knots by 1.15 to get speed in mph. The nautical mile is one minute of arc on a great circle of the earth, assumed to be a sphere of radius 6371 km. It is an annoyance that also appears in wind velocities from official sources, but it does make it easy to find the distances along great circles, which is why it was originally defined. Sea water weighs about 64 pcf, or 1026 kg/m 3. Buoyancy is discussed in Hydrostatics. The action of propellers, though mainly for air, is treated in Fans. The sketch at the right shows the principal dimensions of a cargo ship. The length can be the length overall (LOA) or the length between perpendiculars (LBP) at the water line. The depth is measured from the keel to the upper continuous deck. The draft is measured from the keel to the water line of the loaded ship. The beam is the width of the ship. The front of the ship is the bows, the rear the stern. The starboard side is the right side, facing the front of the ship, while the port side is the left. Our example ship, the AP2 (or VC2) Victory ship, has a LOA of 455 ft, a LBP of 436.5 ft, a beam of 62 ft,

a

depth of 38 ft, and a draft of

28.5

ft. The tonnage of

a

ship

is not a weight, but a volume. One ton is 100 cubic feet. The total internal volume of a ship is its gross tonnage, and if we subtract all the volume not used for cargo, we get the net tonnage. The AP2 had gross tonnage 7850, net tonnage 4850. This means that the cargo occupied 485,000 cubic feet and fuel, engine, crew quarters, etc. occupied 300,000 cubic feet. From the ship's

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dimensions, we find that LBP x beam x depth = 1,028,000 cubic feet, which, of course, is somewhat greater than the gross tonnage, but is consistent with it. Formulas were created to estimate the tonnage of a ship from its dimensions. For wooden ships, Builder's Old Measure was instituted in 1773, in which tonnage = (L - 0.6W)W 2/188. Applied to the AP2, this formula gives 8540 tons, somewhat less than the actual tonnage, indicating that the modern steel ship is less "blocky" than the wooden cargo ship. Of course, formulas applying to the newer ships have also been developed. The tonnage of a ship was used for assessing port dues and other charges. The total weight of the ship and everything in it is the displacement, measured in long tons of 2240 lb. A long ton is only a little larger than a metric ton of 1000 kg, but is considerably larger than the U.S. short ton of 2000 lb. The displacement of the AP2 is 15,200 tons. This weight displaces 532,000 cubic feet of sea water weighing 64 pcf, and loads the ship down to th e normal water line. The deadweight is the difference in displacement when the ship is completely unloaded, of cargo, fuel, crew and so forth. The cargo deadweight is the weight of the cargo alone. For the AP2, the deadweight is 10,800 tons. Therefore, the weight of the ship alone is 15,200 minus 10,800 tons, or 4400 tons. The reference does not give the cargo deadweight of the AP2, but if it is in the same proportion to the deadweight as the net tonnage is to the gross tonnage, it would be 6673 tons. Most of the difference would probably be fuel. The Victory ships, of which the AP2 is an example, were a little larger than the Liberty ships that preceded them, but much less Spartan. The first, SS United Victory, was launched 28 February 1944, and there were 534 in all. Like the Liberty ships, they were all-welded. Instead of the 2000 hp triple-expansion reciprocating engine of the Liberty ships, they had a 6000 hp (or 8500 hp) cross-compound steam turbine geared to the propeller axis. This raised the speed from 11 knots to 15.5 knots, lessening the danger from submarine attack. They were armed with a 5" stern gun, a 3" bow gun, and 8 20mm machine guns. The fuel in both cases seems to have been Bunker C fuel oil. The relation between horsepower, speed and displ acement is given approximately by the Admiralty Coefficient C = (displacement) 2/3(speed) 3/hp, where displacement is in tons and speed in knots. For a typical cargo ship of the period, C was about 400. For the

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AP2, it was 427, using the slightly different figures 14,800 tons and 16.2 knots. The displacement and the speed could differ under different coditions of loading, so the figures are not always consistent. The AP2 had a single propeller of 18.25 ft. diameter and 4 blades, rotating at 100 rpm. The good-practice diameter of a propeller in feet is given by d = 50(hp/rpm 3)1/5, and this propeller agrees with the formula. The pitch of the propeller was 17.5 ft. The power plant was amidships, with a long shaft to the propeller in the stern. This ship carried approximately as much as a heavy U.S. railway freight train (7000 tons), using about the same horsepower, but the freight train will move at twice the speed of the ship on the level, or more, up to about 48 knots. The train will require a crew of three at t he present time, or nine considering 24-hour operation, while the Victory ship had a crew of 54. There are no tracks in the sea, or water on land, but the comparison is interesting. Ships today seem to carry most of their cargo in containers on deck, which must affect their stability; it would be nice to know how this is managed. A cargo ship generally proceeds at a constant full speed, about 80% of the full horsepower available, when at sea, and is most efficient at this speed.

 Charterer Party Charter-parties are, as we have already explained, either for a voyage or for a period of time. (1) A charter-party for a voyage is a formal agreement made between the owner of the vessel and the charterers by which it is agreed that the vessel being tight, staunch and strong, and every way fitted for the voyage, shall load at a certain named place a full cargo either of goods of a specified description or of general merchandise, and being so loaded shall proceed with all possible despatch either to a specified place or to a place to be named at a specified port of call, and there deliver the cargo to the charterers or their assigns. There are clauses which provide for the amount of freight to be paid and the manner and time of payment; for the time, usually described as lay days, to be allowed for loading and discharging, and for the demurrage to be paid if the vessel is detained beyond the lay days; usually also a

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clause requiring the cargo to be brought to and taken from alongside at merchant's risk and expense; a clause that the master shall sign bills of lading for the cargo shipped either at the same rate of freight as is payable under the charter-party or very commonly at any rate of freight (but in this case with a stipulation that, if the total bill of lading freight is less than the total freight payable under the charter-party, the difference is to be paid by the charterers to the master before the sailing of the vessel); and there is usually what is called the cesser clause, by which the charterer's liability under the charter-party is to cease on shipment of the cargo, the shipowner taking a lien on the cargo for freight, dead freight and demurrage. The charter-party is made subject to exceptions similar to those which are found in bills of lading. There are also usually clauses providing for the commissions to be paid to the brokers on signing the charter-party, the address commission to be paid to the agents for the Vessel at the port of discharge, and other matters of detail. The c lauses in charter-parties vary, of course, indefinitely, but the above is probably a sufficient outline of the ordinary form of a charter-party for a voyage.

What has been said with regard to bills of lading as to the voyage, the place of delivery, the exceptions and excepted perils, and the liability of the shipowner and his lien applies equally to charter-parties. It may be desirable to add a few words on demurrage, dead Freight, and on the cesser clause. Demurrage is, properly speaking, a fixed sum per day or per hour agreed to be paid by the charterer for any time during which the vessel is detained in loading or discharging over and above the time allowed, which is, as we have said, usually described as the lay days. Sometimes the number of days during which the vessel may be kept on demurrage at the agreed rate is fixed by the charter-party. If no demurrage is provided for by the charter-party, and the vessel is not loading or discharging beyond the lay days, the shipowner is entitled to claim damages in respect of the loss which he has suffered by the detention of his ship; or, if the vessel is detained beyond the fixed number of demurrage days, damages for detention will be recoverable. Sometimes there is no time fixed by the charter-party for loading or discharging. The obligation in such cases is to load or discharge with all despatch that is possible and reasonable in the circumstances; and if the loading or discharging is not done with such reasonable despatch, the shipowner will be

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entitled to claim damages for detention of his ship. The rate of demurrage (if any) will generally be accepted as the measure of the damages for detention, but is not necessarily the true measure. When the claim is for detention and not demurrage the actual loss is recoverable, which may be more or may be less than the agreed rate of demurrage. The contract usually provides that Sundays and holidays shall be excepted in counting the lay days, but unless expressly stipulated this exception does not apply to the computation of the period of detention after the lay days have expired. Dead freight is the name given to the amount of freight lost, and therefore recoverable by the shipowner from the charterer as damages if a full and complete cargo is not loaded in accordance with the terms of the charter-party. The cesser clause has come into common use because very frequently the charterers are not personally interested in the cargo shipped. They may be agents merely, or they may have chartered the vessel as a speculation to make a profit upon the bill of lading freight. The effect of the clause is that when the charterers have shipped a full cargo they have fulfilled all their obligations, the shipowner discharging them from all further liability and taking instead a lien on the cargo for payment of all freight, demurrage or dead freight that may be payable to him. It has become an established rule for the construction of the cesser clause that, if the language used will permit it, the cesser of liability is assumed to be co-extensive only with the lien given to the shipowner; or, in other words, the charterers are released from those liabilities only for which a lien is given to the shipowner. The shipowner is further secured by the stipulation already referred to, that if the total freight payable under the bills of lading is less than the full chartered freight the difference shall be paid to the shipowner before the vessel sails. A difficulty which sometimes arises, notwithstanding these precautions, is that although an ample lien is given by the charterparty, the terms of the bills of lading may be insufficient to preserve the same extensive lien as against the holder of the bills of lading. The shippers under the bills of lading, if they are not t he charterers, are not liable for the chartered freight, but only for the bill of lading freight; and unless the bill of lading expressly reserves it, they are not subject to a lien for the chartered freight. The master may guard against this difficulty by refusing to sign bills of lading which do not preserve

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the shipowner's lien for his full chartered freight. But he is often put into a difficulty by a some what improvident clause in the charter-party requiring him to sign bills of lading as presented. See Kruger v. Moel Tryvan, 1907 A. C. 272. (2) A time charter-party is a contract between the shipowner and charterers, by which the shipowner agrees to let and the charterers to hire the vessel for a specified term for employment, either generally in any lawful trade or upon voyages within certain limits. A place is usually named at which the vessel is to be re-delivered to the owners at the end of the term, and the freight is payable until such re-delivery; the owner almost always pays the wages of the master and crew, and the charterers provide coals and pay port charges; the freight is usually fixed at a certain rate per gross register ton per month, and made payable monthly in advance, and provision is made for suspension of hire in certain cases if the vessel is disabled; the master, though he usually is and remains the servant of the owner, is required to obey the orders of the charterers as regards the employment of the vessel, they agreeing to indemnify the owners from all liability to which they may be exposed by the master signing bills of lading or otherwise complying with the orders of the charterers; and the contract is made subject to exceptions similar to those in bills of lading and voyage charter-parties. This is the general outline of the ordinary form of a time charter-party, but the forms and their clauses vary, of course, very much, according to the circumstances of each case. It is apparent that under a time charter-party the shipowner to a large extent parts with the control of his ship, which is employed within certain limits according to the wish and directions, and for the purposes and profit of, the charterers. But, as we have already explained at the beginning of this article, the shipowner continues in possession of his vessel by his servant the master, who remains responsible to his owner for the safety and proper navigation of the ship. The result of this, as has been already pointed out, is that the holder of a bill of lading signed by the master, if he has taken the bill of lading without knowledge of the terms of the time charterparty, may hold the owner responsible for the due performance of the contract signed by the master in the ordinary course of his duties, and within his ostensible authority as servant of the shipowner, although in fact in signing the bill of lading the master was acting as agent for and at

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the direction of the time charterer, and not the shipowner. In the language of the ordinary time charter-party the ship is let to the charterers; but there is no true demise, because, as we have pointed out, the vessel remains in the possession of the ship-owner, the charterer enjoying the advantages and control of its employment. Where the possession of a ship is given up to a hirer, who appoints his own master and crew, different considerations apply; but though the instrument by which the ship is let may be called a charter-party, it is not truly a contract of affreightment.

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IMPLEMENTING HEDGING TECHNIQUE ON VESSEL BUNKERING

23

 Contract of Affreightment (COA): It is the expression usually employed to describe the contract between a ship-owner and another person called the charterer, by which the ship-owner agrees to carry goods of the charterer in his ship, or to give to the charterer the use of the whole or part of the cargo-carrying space of the ship for the carriage of his goods on a specified voyage or voyages or for a specified time. The charterer on his part agrees to pay a specified price, called freight, for the carriage of the goods or the use of the ship. A ship may be let like a house to a person who takes possession and control of it for a specified term. The person who hires a ship in this way occupies during the specified time the position of ship-owner. The contract by which a ship is so let may be called a charter-party; but it is not, properly speaking, a contract of affreightment, and is mentioned here only because it is necessary to remember the distinction between a charter-party of this kind, which is sometimes called a demise of the ship, and a charter-party which is a form of contract of affreightment. As the first paragraph explains it is nothing but a contract with the charterer to lift a specific cargo i.e. to load and to discharge to the receiver. In this kind of shipm ent the vessel will be declared when the shipment is done. The freight is fixed for the entire contract of the shipment.

For example we can see a contract of affreightment. Cargo has been taken on contract for moving it from west cost India to Persian Gulf. Several aspects are fixed on the charterer party and the contract of quantity to move per shipment is also fixed. Please find below the table of a contract.

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Voyage no

vessel

Preliminary

Lay

Days 15 days

Tentative Lays

lays

Days 6 days

Tonnage MT

Target laod Date

1

TBN

13-Jun-06

26-Jun-06

17-Jun-06

22-Jun-06

18000

20-Jun-08

2

TBN

13-Jul-06

26-Jul-06

17-Jul-06

22-Jul-06

15000

20-Jul-08

3

TBN

19-Aug-06

01-Sep-06

23-Aug-06

28-Aug-06

15000

26-Aug-08

4

TBN

13-Sep-06

01-Sep-06

17-Sep-06

22-Sep-06

15000

20-Sep-08

5

TBN

23-Oct-06

05-Nov-06

27-Oct-06

01-Nov-06

15000

30-Oct-08

6

TBN

22-Nov-06

05-Dec-06

26-Nov-06

01-Dec-06

15000

29-Nov-08

7

TBN

23-Dec-06

05-Jan-06

27-Dec-06

01-Jan-06

17000

30-Dec-08

From the column you can clearly understand that cargo to be moved totally of 110,000mt of cargo. Where a contract has been fixed that these many shipments will be made by our company with fixing the freight rate per mt.

When performing this kind of COA there are several aspects to be considered by the company as a ship owner to reduce the cost and gain more profit out of the shipment. We are going to take a major part of expense of owners on the shipment. Bunkering where the vessel is going to be bunkered for the entire shipment from west cost India to Persian Gulf.

We are implementing a market technique for the bunker arrangement for the vessel. We shall discuss about the Hedging technique.

Implementing Hedging Technique: Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract. Investors use this strategy when they are unsure of what the market will do. A perf ect hedge reduces your risk to nothing (except for the cost of the hedge).

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Hedging is done is the bunkering of the vessel’s. Please find below the maritime fuel used in the vessel.

In the maritime field another type of classification is used for fuel oils: 

MGO (Marine gasoil) - roughly equivalent to No. 2 fuel oil, made from distillate only



MDO (Marine diesel oil) - A blend of gasoil and heavy fuel oil



IFO (Intermediate fuel oil) A blend of gasoil and heavy fuel oil, with less gasoil than marine diesel oil



MFO (Medium fuel oil) - A blend of gasoil and heavy fuel oil, with less gasoil than intermediate fuel oil



HFO (Heavy fuel oil) - Pure or nearly pure residual oil, roughly equivalent to No. 6 fuel oil

Marine diesel oil contains some heavy fuel oil, unlike regular diesels. Also, marine fuel oils sometimes contain waste products such as used motor oil.

How are futures used to hedge a position for bunkering the vessel?

Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between two parties to buy or sell an asset at a particular time in the future for a particular price. The main reason that companies or corporations use future contracts is to offset their risk exposures and limit themselves from any fluctuations in price. The ultimate goal of an investor using futures contracts to hedge is to perfectly offset their risk. In real life, however, this is often impossible and, therefore, individuals attempt to neutralize risk as much as possible instead. For example, if a commodity to be hedged is not available as a futures contract, an investor will buy a futures contract in something that closely follows the movements of that commodity.

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When a company knows that it will be making a purchase in the future for a particular item, it should take a long position in a futures contract to hedge its position. For example, suppose that Company X knows that in seven months it will have to buy 6,000 mt of IFO and 2,500mt MGO to fulfill an order. Assume the spot price for Bunker is 500 USD IFO/MT and 900 USD MGO/MT. By buying the futures contract, Company X can lock in a price of Bunker is 500 USD IFO/MT and 900 USD MGO/MT. This reduces the company's risk because it will be able close its

futures

position

and

buy

6,000mt

of

IFO

and

2,500mt

MGO

in

seven

months.

If a company knows that the vessel will be consuming 6,000mt IFO and 2,500mt MGO, it should take a short position in a futures contract to hedge its position. For example, assume the spot price for bunker is 650 USD IFO/MT and 1200 USD MGO/MT and the futures price is 500 USD IFO and 900 USD MGO. Company X would short futures contracts on bunker and close out the futures position in seven months. In this case, the company has reduced its risk by ensuring that it will receive 500 USD IFO/MT and 900 USD MGO/MT it buys. At the end of each contract the difference in the physical supplied amount and the future contract amount will be settled by the trader.

Futures contracts can be very useful in limiting the risk exposure that an investor has in a trade. The main advantage of participating in a futures contract is that it removes the uncertainty about the future price of an item. By locking in a price for which you are able to buy or sell a particular item, companies are able to eliminate the ambiguity having to do with expected expenses and profits.

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CONCLUSION

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Conclusion From the before chapter we have seen a brief of the hedging technique implemented on the bunker against a COA for the cargo shipment. In this part we are going to see the profit gained by implementing the technique. As clearly explained that it is a risk management system and limited amount of product is hedged. We can see the below a week market price of the bunker and the graph. Price (USD/mt) Date

IFO 12/07/2006 13/07/2006 14/07/2006 15/07/2006 16/07/2006 17/07/2006 18/07/2006

MGO 572 649.5 637.5 636 650 679 702

1206 1285 1258.5 1263 1246.5 1296.5 985

BUNKER PRICES 1400 1200

800

IFO

600

MGO

400 200 0 12 /0 7/ 20 06 13 /0 7/ 20 06 14 /0 7/ 20 06 15 /0 7/ 20 06 16 /0 7/ 20 06 17 /0 7/ 20 06 18 /0 7/ 20 06

Price

1000

Date

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From the graph we could understand that the bunker prices are varying daily. Now for the COA shipment we have hedged for a limit of 6,000mt IFO and 2,500mt of MGO. We will be bunkering the vessel on the physical market rate and the price difference of the future price hedged 500 USD IFO/MT and 900 USD MGO/MT. The physically supplied market price is more than the future price hedged. We will be getting the difference of amount from the trader. By this move of the market, as owners we gain a lot on the vessel bunkering. At the same time when the bunker price falls down , which will intern be a big loss to owners. As we started this chapter by explaining it is a technique of risk management.

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