# Freight

## Fundamentals

Chartering a suitable vessel is a key contributor in determining trade profitability. Chartering costs are usually fixed as soon a voyage is scheduled using a Forward Freight Agreement (FFA). A charterer (FFA buyer) and a ship owner (seller), often through intermediation of a broker, lock in advance the rate for a given voyage. When the voyage effectively occurs, if prevailing market rate is above the FFA strike, the difference between both rates will be reimbursed by the seller to the buyer. The derivative thus stabilises the cash flows of both parties.

Freight rates fluctuate according supply and demand conditions and those vary markedly. This price volatility motivates a very active FFA market, which participants are usually member of the Baltic Exchange .
The Baltic publishes daily forward assessments, which are price estimates based on assessments submitted by leading FFA brokers. Those cover both dry and tanker markets, along the major shipping routes on which international trade relies. The Baltic quotes underpin a range of cleared freight contracts, listed by different exchanges.

Production and consumption data can be found in the statistical figures released by the Worldscale

An interesting article form the Baltic Exchange explaining to regulators the genesis of freight indices and benchmarks is given hereafter:

Baltic benchmarks
The shipping marketplace is arguably problematic from the point of view of benchmark production. Each vessel is different in some small or large degree. It may be a better or worse design from an efficiency point of view. It may be new or older tonnage which will have an impact on its attractiveness because of perceived risks and running costs. An owner may be seen as a high quality owner or a lower quality owner. The vessel or owner may have a good (or bad) record with record to Port State Control inspections and detentions. In addition, load ports and cargoes vary in terms of their desirability from the point of view of the owner, or their costs. Some cargoes are considered dangerous and high risk (eg Nickel Ore, which has a tendency to liquefy in certain circumstances) while other cargoes, such as grain, may be more appealing to owners.

The shipping marketplace is a private market. Owners and charterers usually negotiate through a broker for a transaction based on either a Voyage rate (a $/tonne rate for the shipment of the commodity) or a Timecharter rate (a$/day rate for the use of the ship). In each case both parties will consider what they know of available vessels and cargoes within the window of availability required (the Laycan) and will therefore make a determination as to the current commercial rate. Fixtures remain uncertain for a time as there are usually "subjects" to be resolved, ie matters outstanding which need confirmation, usually from the owner. This may for example be an issue of precise specification of the ship or the willingness of the owner to carry certain cargoes or load or discharge at certain ports.

Once a fixture has been fully finalised and subjects lifted, information about the transaction may become widely know in the marketplace. On the other hand it may not be disclosed since there is no obligation to do so and neither party may have an interest in disclosure. Equally the transaction may have been negotiated on the basis that it is P and C (Private and Confidential), in which case both parties and the broker(s) involved have an obligation not to disclose information.

In practice a considerable amount of reasonably accurate information does become generally available to the market. The Baltic Exchange publishes a daily fixture report summarising known information and also a daily market report, both covering the dry sector. However, there is no suggestion this represents complete information and there are occasions when it is not entirely accurate and may be corrected later. The tanker sector trades in a somewhat more standardised way with most business being fixed on a voyage basis and with relatively fewer participants the market may be considered somewhat more transparent.

It should also be understood that although it is important to provide the benchmarks at a specific time on a daily basis which are used for settling derivatives contracts and other benchmark-based transactions, not all routes will be fixed every day, or even have business quoted with any real reliability.

Thus the Baltic Exchange has developed a carefully defined methodology for the production of its benchmarks which reflects the difficulties in reporting this complex market and which exploits certain characteristics of it which allow for the production of credible and reliable indices on an impartial basis.

As explained above, in the international shipping market there is no reliable reporting of bids, offers and transactions, and such transactions take place on a truly global basis . More significantly, no two transactions can be considered to be identical. This is particularly in the timecharter market, but it remains true also in the voyage market.

The advantage in this matter which is enjoyed by the global shipping marketplace is the presence of truly independent, competitive, commission-earning brokers. Many persons in the shipping market will describe their profession as that of a shipbroker. A person working for a commodity house who is responsible for contracting the tonnage they require will call himself a shipbroker. Equally the representative of an owner, where working directly for the owner or in a separate but tied company, will also be a shipbroker.

However, the bulk of business is in the end transacted through intermediaries which are competitive shipbroking firms. These firms are paid purely on the basis of a commission for each transaction they negotiate. They do not invest in the market and therefore, critically, represent a neutral and independent source of information on the market. This situation may well be completely unique to shipping.

The Baltic prices its benchmarks only on the basis of contributions from a panel of competitive shipbrokers who are members of the Baltic Exchange and who agree to provide their professional assessments of the prevailing market rate each day at the time of submission. Baltic panellists are selected on the basis that they have specific expertise in the routes they report and are capable of making appropriate assessments of the prevailing open market rate, taking into consideration appropriate factors. Such factors would include available vessels and cargoes, current negotiations, recent fixtures (adjusted as appropriate to reflect the benchmark trip), market sentiment etc. We avoid using panellists who have a limited scope of business or are heavily reliant on a small number of clients and might therefore be subject to untoward influence. The panellist is guided by the Manual for Panellists which provides guidance as to factors which should or should not be considered in providing assessments.

For each route the Baltic creates and publishes a mathematic average of all of the submissions.

## Shipping

### Vessels

Freight is specified by the cargo content or nature of the transported goods:

• Dry bulk: coal, iron ore, grains
• Wet (tanker): dirty (crude) or clean (refined products)

Freight is further specified by vessel type. A distinctive feature of any vessel is its cargo capacity. How much weight a ship can carry safely is defined as its dead weight tonnage (DWT). It includes mainly cargo but as well: fuel, water, stores and passengers. If one adds on top of it the lightship weight, one obtains the displacement or actual total weight of the vessel. Cargo being by far the major component of it, dead weight tonnage is used as a proxy of the carrying capacity of a vessel. Obviously, there are more features looked after when assessing a vessel, but DWT is the most explicit one for usage an pricing. The most common sizes of sea-going vessels are:

Vessels

### Chartering

Chartering can happen either way:

• Time charter: the chartere pays a daily rental, ship fuel and port charges, while the ship owner is responsible for vessel maintenance, crew and insurance.
• Voyage charter: one pays a rate per metric ton of cargo to be carried from departure to destination harbour, fuel and port charges being included.

Charting agreements between shipowner and charterer define precisely all terms of the trip:

• Lay time: Agreed time for loading and discharge.
• Demurrage: If the charterer exceeds the agreed rental period, a daily fee will have to be paid to the shipowner.

Vessel charasteristics

Vessel types

Freight units
Unit Measurement
World scale The Worldscale  is an organization which publishes towards the end of each year the 'Worldscale Tanker Nominal Freight Rate' prevailing for the coming sailing year. This figure in USD/MT is usually called 'Flat rate' (FLR). There is one rate per route, which represents the unitary floor price to cover all costs incurred to ship goods from departure to destination harbor.
WSP,
FLR
Prices for freight will depend on market conditions and can be expressed as a multiple of the flat rate. This multiple expressed in percentage is called 'Worldscale points' (WSP).

$$\textsf{Freight rate} \space_{\textsf{USD/MT}} \space = \textsf{Flat rate} \times \frac{ \textsf{Worldscale points} }{100}$$

$$\textsf{Freight rate} \space_{\textsf{USD/BBL}} = \textsf{Freight rate} \space_{\textsf{USD/MT}} \times \frac{1}{\textsf{Density} \space_{\textsf{BBL/MT}}}$$
Cargo weight Quotes are per transported weight unit. Several units apply.
MT Metric ton
ST Short ton (= 0.907 MT)
LT Long ton (= 1.016 MT)
Voyage charter Quotes are for a voyage (whatever the duration) of a given vessel type.
VOY.VES The time charter equivalent (TCE) of a given voyage is often provided. Calculation formulas may differ, but remain a variation around: freight profitability (income minus costs) divided by number of days for the voyage. Inputs (bunker costs, port charges, exchange rates) vary daily, reason why an approximate TCE per route is provided as an index.

$$\textsf{TCE} \space_{\textsf{USD/DAY}} = \frac{\textsf{Freight income} \space_{\textsf{USD}} - \textsf{Bunker cost} \space_{\textsf{USD}} - \textsf{Port cost} \space_{\textsf{USD}} } { \textsf{Voyage} \space_{\textsf{Days}} }$$

whereby:

$$\textsf{Freight income} \space_{\textsf{USD}} = \textsf{Freight rate} \space_{\textsf{USD/MT}} \times \textsf{Vessel DWT} \space_{\textsf{MT}} \times (100 - \textsf{Brokerage} \space_{\textsf{pct}})$$

$$\textsf{Bunker cost} \space_{\textsf{USD}} = \textsf{Bunker consumption rate} \space_{\textsf{MT/DAY}} \times \textsf{Bunker price} \space_{\textsf{USD/MT}} \times \textsf{Voyage} \space_{\textsf{DAYS}})$$
Time charter DAY.VES Quotes are for one day of vessel disposal.

## Routes

The underlying of freight trading is the capacity to move goods around the globe. Market participants (shippers, brokers, traders) have identified the most frequently navigated maritime routes, per freight nature (dry, wet) and vessel capacity. The Baltic Exchange gathers assessments from shipbrokers on planned voyages. The traded routes hence effectively reflect the reality of the freight market.

• Major ports map 🌐
• Dry bulk, Handysize routes 🌐
• Dry bulk, Supramax routes 🌐
• Dry bulk, Panamax routes 🌐
• Dry bulk, Capesize routes 🌐
• Clean Tanker routes 🌐
• Dirty Tanker routes 🌐
• LPG Tanker route 🌐

Ports

Routes

## Markets

### Markers

The Baltic publishes forward freight prices, for different routes and vessel capacities. It releases as well 'blended' indices, which are not hooked on a single route, but are a weighted basket of several routes for a given vessel type. The weights reflects the economic importance of the route in world trade, as tracked by the Baltic Exchange. The Baltic indices underpin several derivatives contracts quoted by Exchanges such as EEX and SGX.

Other agencies, such as Argus and Platts, also report forward freight indices.

### Contracts

The Baltic indices underpin several future contracts quoted by Exchanges such as EEX and SGX.

Freight publications

Freight markers

Freight baskets

Freight routes in baskets
Baltic Capesize

The Baltic Capesize 2014 vessel is based on the following description:

• 180,000mt dwt on 18.2m SSW draft
• Max age 10 yrs
• LOA 290m, beam 45m, TPC 121
• 198,000cbm grain
• 14 knots laden/15 knots ballast on 62mt fuel oil (380cst), no diesel at sea

When considering the prevailing timecharter market rate for the Baltic capesize vessel, panellists should assume that, if steaming at 12 knots laden or 13 knots ballast, the vessel will consume 43mt fuel oil (380cst), no diesel at sea.

Baltic Handysize

The Baltic Exchange handysize vessel is based on the following vessel description:

• 28,000mt dwt on 9.78m SSW draft
• Max age 15 yrs
• LOA 169m, beam 27m
• 37,523cbm grain, 35,762cbm bale
• 5 holds, 5 hatches, 4 x 30mt cranes
• 14 knots average laden/ballast on 22mt fuel oil (380cst), no diesel at sea
Baltic Panamax

The Baltic Panamax vessel is based on the following description:

• 74,000mt dwt on 13.95m SSW draft
• Max age 12 yrs
• LOA 225m, beam 32.2m
• 89,000 cbm grain
• 114 knots on 32mt fuel oil (380cst) laden/28mt fuel oil (380cst) ballast, no diesel at sea.
Baltic Supramax

The Baltic Supramax vessel is based on a standard "Tess 52" type vessel of the following description:

• 52,454mt dwt on 12.02m SSW draft
• Max age 15 yrs
• LOA 189.99m, beam 32.26m
• 67,756cbm grain, 65,600cbm bale
• 5 holds, 5 hatches, 4 x 30mt cranes with 12cbm grabs
• 14 knots laden/14.5 knots ballast on 30mt fuel oil (380cst), no diesel at Sea

From 3 April 2017 the Supramax benchmark vessel will change to a standard "Tess 58" type vessel of the following description:

• 58,328mt dwt on 12.80m SSW draft
• Max age 15 yrs
• LOA 189.99m, beam 32.26m
• 72,360cbm grain, 70,557cbm bale
• 5 holds, 5 hatches, 4 x 30mt cranes with 12cbm grabs
• 14 knots laden/14 knots ballast on 33mt/32mt fuel oil (380cst), no diesel at sea
• 12 knots laden/12.5 knots ballast on 24mt/23mt fuel oil (380cst), no diesel at sea