Industry Ponders

Amit Oza
Director
Astramar Shipping & Trading Services Private Limited

Evolution of Ship Chartering Practices

Simply defined, chartering is an activity within the shipping industry. In some cases a charterer may own cargo and employ a shipbroker to find a ship to deliver the cargo for a certain price, called 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.

The skill to negotiate and conclude contact for carriage of goods or a lease of ships in the most cost efficient and risk free manner possible is termed as ship chartering. Ship chartering further encompasses the skill to execute the obligations under the negotiated contract of carriage and the lease, including all aspects related to transportation and safe delivery of the cargo under the terms agreed. Ship chartering skills are required both by ship owners and cargo interests who need to transport the cargoes.

Modern day ship chartering practices are a direct result of the advances made by European economies during the industrial revolution. The vast colonial empires of European countries necessitated large-scale movement of raw material from colonies, and scientific advances made this movement by ocean transportation possible.

The genesis of modern ship chartering can be found in the Baltic coffee shops in early 19th century London, where merchants and shipowners (frequently also the Masters of the vessel) would meet to finalize the employment of the vessels. Over a period of time, this ‘meeting place’ was institutionalised as the Baltic Exchange, which is a major ‘meeting place’ for shipowners and cargo interests globally. Over the years, ship chartering evolved as a fine craft, a blend of science and art, with its own jargons, methodology and practices. The amazing aspect of this evolution is that the practices, out of necessity, were adopted uniformly all over the world. This uniformity helped immensely in globalisation of international trade, as new entrants were able to trade shipping assets and cargo requirements worldwide. So, as China became more prominent in ship owning, Chinese owners could charter their vessels to cargo interests and ship-operators world wide, as they all essentially spoke the same language of chartering – following same chartering practice worldwide. This uniformity was also greatly helped by adoption of English Law as the most acceptable and prevalent legal system for chartering contracts. English Law still mostly governs chartering contracts since it is most litigated, giving greater clarity to contractual terms agreed. It is as also most consistent in terms of judgements, as it is based on Law of precedence. This emphasis on precedence gives a high degree of clarity to contracting parties on their rights and obligations, which makes contracting possible between parties residing in different jurisdiction.

Relevance of Ship Chartering

Ship chartering today is an important component of global economy. Efficient and cost effective transportation of bulk commodities is the key to global economic growth. There are several additional advantages to entities with ship chartering skills, economies employing best ship chartering practices and for host nations where chartering and related skills have developed as a major industry.

At the most basic level, an entity with chartering capabilities has several advantages over others which do not have the same. Goods transacted with the counter party arranging for freight always have a margin that is lost by entity which does not arrange for shipping. Chartering skills give the option to entities to plan shipping schedules, maximizing returns on sales where prices are volatile. Additionally, control of shipping allows entities to charter vessels on long term leases, further reducing freight costs. Almost all large trading companies, grain houses, coal mining companies, power utilities maintain a very active chartering desk. The control of shipping helps them to ensure timely performance of commodity shipments in a most cost effective manner with minimum possible risk. Companies like Cargill, Vitol, Glencore, Phibro, BHP, Vale, Koch Carbon etc. all maintain a very active presence in chartering.

An economy whose entities ensure shipping in most efficient manner gains immensely. All major economies need to move cargoes by sea, as it is the most cost effective way of transporting bulk cargoes. It is observed that developed economies tend to have entities with chartering skills, with developing and under developed economies paying for these services. For example, the commercial management of majority of imports and exports of a developing country like Bangladesh is controlled from some other nation, with the economy of Bangladesh paying for such services.

At the end of spectrum are economies that have developed chartering to a very high degree and offer their services and expertise to goods being shipped between globally including situations which may not even involve the host economy where the chartering entity is based. Over the years, developed economies of Europe, most notably Danish and Norwegian, have developed chartering into a complex trading business. Entities like Norden, Klaveness, Clipper etc, execute worldwide ‘contracts for carriage’, which they fulfil by mix of owned and leased vessels. So, Norden may have a contract to ship two million tons of cargo from Chile to Argentina over three years for an agreed price, which they will execute with vessels under their control. The trade is further refined by new age techniques like hedging freight risks by paper trade, currency hedging, fuel hedging and a host of other risk management methods.

Finally, ship chartering spews a number of ancillary activities like shipbroking, marine insurance, shipping finance etc, where services can be offered worldwide. Chartering thus remains a tool of vital economic relevance in the world and national economies.

Ship Chartering in Indian Context

Ship chartering in India is a rather recent development. After independence, in spite of substantial import and export requirements, India could not develop a vibrant ship chartering industry. This was due to several reasons, but primarily due to control of trade by public sector undertakings and canalising of imports and exports. While this arrangement was necessary for a nascent economy, the practice continued well into 1990s. Transchart, which is a part of Ministry of Surface transport, undertakes all chartering activities for PSUs. While Transchart has done a commendable job in securing competitive freights for carriage of goods, it does not have the mandate, scope or skills required for balancing risks and costs by undertaking modern chartering tools like time chartering and freight hedging. The limited scope mandated to Transchart meant that complex ship chartering techniques never evolved in India.

Several Indian trading houses like Adani and industrial groups like Tata, Reliance, Jindal etc. have a full-fledged chartering divisions. These trading houses and groups have achieved significant expertise and knowledge in transportation of goods in most cost effective and risk free manner. The advent of these chartering groups has also led to a large number of shipbrokers In India. Many large global broking firms have presence in India, including Clarksons, SSY etc. However, the skills developed by these entities are largely restricted to efficient handling of their own in-house chartering requirements. None of the groups have evolved into a global ship operator of significant scale.

Indian ship owners have had limited success in evolving themselves as large global service providers for third party carriage using leased tonnage along the lines of European shipping companies. Most Indian ship owning companies still depend on Indian cargoes of PSUs reserved for Indian tonnage under Indian shipping policy, as well as being engaged in coastal trade governed by Cabotage rules, which does not permit foreign flag vessels in coastal trade. Indian ship owning companies have thus, so far, failed to develop a significant presence in large-scale global carriage of bulk commodities, with consequent lack of more advanced and complex chartering techniques and methodology.

While ship operators who own vessels in India have managed some concessions like tonnage tax etc., from the government, pure ship operators who lease tonnage from the open market have almost no presence in India. This crucial segment is missing in India due to permits and approvals required for leasing of vessels, along with high taxation as they cannot be a part of tonnage tax regime. Another reason for lack of development of leased ship operators is lack of finance and funding in India. The cost of funds in a highly inflationary economy like India is high and global competitors have access to cheaper funds.

Increased availability of trained manpower at globally competitive costs has created opportunities in outsourcing chartering and related services from India. This area, by far, offers maximum potential for chartering in Indian context. To illustrate, Global giant Cargill operates a centre in Kochi, which looks after all back office work for chartering office in Singapore. Just like field of Information Technology, given correct incentives, the Indian ship chartering industry can slowly move up the value chain in services offered to overseas clients. While the ownership of ships may remain overseas due to easier and cheaper funds, Indian entities may develop the skills to manage and operate these funds and ships globally.

To conclude, ship chartering skills contribute greatly to economies with companies that provide global shipping solutions to third party trades worldwide, while such skills are absolutely essential to preserve value for entities and economies that require transportation of their own goods by sea.

For India, it is essential that chartering skills are developed to ensure that India’s bulk sea borne trade is carried out in the most efficient manner. While it seems difficult to create a global ship operating entity in India moving large volumes of third party cargoes worldwide, the global chartering scenario provides excellent opportunities to offer high-end out sourced management services.

Amit Oza is the founder director of Astramar Shipping & Trading Services Private Limited. A member of Institute of Chartered Shipbrokers (MICS), Amit started his career in 1992 with Paramount Shipbrokers in London, UK. In 1995, he worked for Al Aqili Group in Dubai and in 1999. Amit moved to Libra Shipping LLC, which is the chartering arm of Adani Group. In 2002 Amit returned to India to join Shell Hazira Gas Pvt Ltd, a port led LNG project. At Shell Hazira, Amit worked on port development and divestment for Hazira Port, which involved techno commercial studies and preparing a project framework in order to induct a value adding partner in the port company.

Amit is also a consultant with Investec Bank plc, London for Shipping Finance opportunities. Amit also works exclusively for clients active in movement of Iron ore, coal, liquid chemicals in bulk and petroleum products.