4 September 2007
Freight markets myths
Freight markets myths
As the publication of the article ‘MMK Steel Shipments via Directoriya (Yeisk)’ has sparked off some questions, telephone calls and accusation of its being prejudiced as well as an allegation of its being ordered we have decided to give our comments on the article’s content and the reaction.
Well, as for the major question of the audience we inform that neither a penny, nor a cent, nor a Mongol tugrik has been received by us for publishing the article mentioned.
In spite of the fact that the point of view behind article undoubtedly reflects that of one side its content as a whole doesn’t go against the convictions of the site’s administration and generally the description of the events and facts is realistic.
Agreeing in many aspects with the article’s author we ignoring concrete cases would like to give some general comments concerning the MMK Steel Shipments via shallow drafted ports of the Azov-Black Sea basin and to debunk some of the myths occasionally created by the participants of the market in general.
In reality, there is a stable cargo traffic of about 80-100 thousand tons of steel product every month (except the Novorossiysk share being transported through the SRZ ???) processed through the Azov ports (now mainly Yeisk, Directoriya berth bound for Black Sea Marmara Turkey, Greece, Italy (the Adriatic and West Coast), East Mediterranean, etc. If one does a simple arithmetic it is possible to calculate that on the base of a standard commission of 2.5% we are talking about the annual total from 750,000 to 1,000,000 USD (the calculations have been based on the rate of 25 to Turkey and 35 to Adriatic that naturally fluctuate, yet their on the average the figures remain approximately the same). It’s important to note that the abovementioned figures is being calculated with the assumption of a standard commission of 2.5 pct on a standard gencon c/p. Possible marginalizing and paraplane-gliding (copyright of an unknown author) were ignored.
So, are the figures relevant for MMK as such? I think everyone will agree that not as these means for a leader in its field with multibillion hard cash revenues are within the deviation limit. The only thing, we think, the factory is interested in is a stable and planned functioning of the value chain in dispatching their export volumes. Yet, the sum has been and always will attract brokers, forwarders and other go-betweens (in the good sense of the word), with their fights occasionally resulting in breaks in their dispatch schedules.
Myth Number One.
The main myth and the competitive edge with which different participants of the process are from time to time trying to get exclusivity and rights to freight are the so-called COP and CQD terms in the port of loading. We are not sure that most of the managers or the participants of the market constantly using the expression while determining the budgets, lobbying interests of different sides and taking decisions know what the terms mean. The very usage of the phrase – we will confirm you COP/CQD in the port of dispatch – is a sort of password showing participants belonging to a club of elect participants of the market. The same is with the phrase ‘In these processes a synergy can be determined’ from the lips of a big-4 MBA graduate from top 100. Or ‘I will give you a Parabellum’ from Ostap Bender’s lips.
Thus, COP = Customs of Port/CQD = Customary Quick Dispatch. Clearly, one can’t say both terms are 100% synonymous and there are differences in particulars but for the current disquisition let’s assume them identical meaning no responsibility of demurrage in the dispatch port for the freighter. At that, let’s assume that the rate on the COP/CQD terms must be higher than the rates on the agreed terms. Let’s see whether or not the price of COP/CQD is justified. We can’t accurately suppose on what sum the rate of COP/CQD will increase in the budget compared to normal rate, but let’s suppose that it won’t be less than 1 USD. So, some riveting maths.
The terms of the exercise:
The monthly turnover – 80,000 tons
The cost of COP/CQD – 1 USD = 80,000 USD a month
The usual dispatch conditions (without COP/CQD) = SSHEX EIU , FRI /MON 8/17
The standard demurrage on usual conditions of 2500 USD pdpr for a ship with 3000 dwt/ 4000 USD pdpr for a ship with 5000 dwt.
Let’s calculate the official laytime in September of 2007
For SSHEX EIU , FRI /MON 8/17 conditions it will be 380 hours or 15.8 days not taking into account weather conditions and other factors diminishing laytime.
So the amount of ship/days on a demurrage a freighter can allow itself for 80,000 USD a month are:
- for ships DWT 3000 - 60,5 days
- for ships DWT 5000 – 37,8 days
In both cases the number of days exceeds those in a month, so comments on this point are obsolete. How effective is it to invest in a budget what will not necessarily happen? Yet, being once invested in a budget the means will be in any case used.
By the way, can any of the ship-owners reading this article recall a case when he last freighted on CQD conditions and where does he send these offers when they crop up?
Myth Number Two (a global one).
Another myth, we think, is so-called ‘exclusivity’. The myth has been for a long time successfully used by the broker-shipping community as is seen on the example of all types of cargoes, destinations and volumes in all the basins of all oceans. When a broker tries to persuade a freighter or a ship-owner that coming to the market with the open position of his cargo and/or ship leads to the freight’s rate being raised (for the freighter) and/or lowered (for the ship-owner) he lies in his throat. Up to now no one has been able to clearly state what are the advantages in a situation when a cargo (or a ship) is handled by one and not several brokers and how this promotes the freighter’s or the ship-owner’s interests. And what is the advantage in privacy pf freighting tonnage (except for the direct advantages to the side acting as ‘an exclusive broker)?
Myth Number Three.
Long Term Contracts of affreightment
No doubt an exporter’s main goal is a break-free export chain at predictable prices and the presence of long-term contracts on agreed budgets
Our opinion that may be questionable signing long-term contracts based on race charters with big ship-owners do not mean they will fulfilled and the exporter will provide a smooth functioning his value chain.
No one will deny that a freight’s rate in its ‘spot’ meaning, i.e. on a concrete date at a concrete time and to a concrete destination, is a rather volatile expression.
The freight market, at that, due to seasonal factors as well as market fluctuations on other export cargoes is never constant.
Let’s assume that at a time a long-tern contract has been signed either directly with a ship-owner or via a broker on a concrete volume by a concrete number of ships. And the freight rate during the time of signing was ‘F’, it being the market one at the time of signing. Let’s assume after some time since signing the freight market has changed
There are two outcomes to the situation:
The rate ‘F’ to the base destination has gone down. As a result, the freighter at best pays the ship-owner the extra, at worst the extra is being dissipated in the corrupt par of the chain.
The rate ‘F’ has gone up. As a result, the ship-owner seeks all ways not to fulfil the contract by being late, leaving for an unforeseen repair. In short, he uses all means possible to re-assess the freight rate or to cancel the agreement.
Of course such a behaviour is not usual for all the ship-owners but is typical for many participants of the shipping business of river-sea shipping in the Azov-Black Sea basin (not to mention the Caspian) as it is being conducted rather according to criminal etiquette in spite of references to the English jurisdiction in all re-caps and contracts. There are single cases rumoured by generations of ship-owners and freighters as being applied to the London Arbitrage not to mention cases closed.
Is, thus, this a no-win situation? Might a correct export dispatch scheme be organized and is there any sense in SELLING at CIF and C&F? We think that absolutely yes.
Having dispelled the myths and having refused to draw exclusive go-betweens and using services of the professional participants of the market it is possible to further cut the expenses and many other things.
The only thing impossible is to affect weather and the freight market on a specified date.
