By Foluke Akinmoladun
A time charterer has higher risks than the ship owner but the rewards are also greater. Where the market falls however, the time charterer is stuck with paying the higher rate. Where the market rises, the time charterer has a ship that is cheaper than originally contracted and thus can sublet to others at a higher rate. A time charterer can however hedge their risks by making use of derivatives over the period of the hire.
Another factor to consider in choosing a time or voyage charter is environmental costs. Starting January 1, 2020, on the basis of IMO 2020-compliant fuel, all marine fuel burned on vessels not equipped with exhaust gas scrubbers must have a sulphur content of 0.5 percent or less. The premium of compliant ultra-low-sulphur fuel over the cost of high-sulphur heavy fuel oil (HFO) is unknown. A time charterer pays for the fuel and not knowing this variable may make it difficult for ship owner and charterer to come to an agreement on what the fair day rate should be. Not only would time charterers fear paying too much, ship owners would fear tying up tonnage too cheaply. This may not necessarily apply in a voyage charter where the ship owner is the only one to be concerned with fuel costs so it is the ship owner that will be at the short end of the stick.
Time charters give to ship owners an income that is fixed and remain unvaried for the duration of the contract. Hence, the owner will benefit from this contract in case of a market rate of hire with the tendency to drop. On the other side, if the market rates will rise, he will be bound to a contract that will prove less rewarding than the one he could have found with the rates available in the markets. Thus, if the owner believes that the market will grow, he would tend to exploit his ships under voyage charters while if he foresees a dropping market, time charters will be more profitable, but less flexible in case of a rapid change of the market conditions.
Another reason for time chartering is when a liner company seeks temporarily to supplement its own fleet in order to cope with a seasonal increase in business. Time charter is often regularly used by container lines to cater for their ‘feeder’ business and there is a whole segment of the market devoted to relatively small container ships to fill the requirements of the feeder industry.
There are also speculators who think that they can trade ships more profitably than the owners themselves and will take ships on time charter and then re-let them on a voyage basis hoping to make a substantial profit between the cost of the time charter and the income from the voyage charter.
In conclusion, whether a ship owner decides to use time charter or voyage charter is dependent on a number of factors. These are but not limited to, the type of trade the ship was designed for, the ship’s capacity, the trend in the market, the season for the cargo, the storage and stowage peculiarities of the cargo and the maintenance and operations elements of the ship both cost and technical requirements. This is why the services of a shipbroker is relevant both to make the right decision on the type of charter but also for the markets to engage in.
Foluke Akinmoladun is a lawyer, accountant, mediator and arbitrator. She is the Managing Solicitor of Trizon Law Chambers and can be reached at: Foluke.A@trizonlawchambers.com