HubSE provides software that supports laytime demurrage and despatch in the bulk trading industry. Though you may be familiar with the terms demurrage and detention in the context of the container business, this article will be focusing on the process of laytime and demurrage in those cases where the entire vessel or maybe a part of it is chartered to move a cargo of oil, chemicals, or dry bulk around the world.
The unexpected charge: demurrage
Where a charterer charters a vessel for a voyage from load port to discharge port, he/she will agree on:
- the freight rate
- the demurrage rate
- the laytime and demurrage ‘rules’ governing the trip.
If the vessel is delayed for charterers’ purposes in the load and/or discharge ports beyond the agreed laytime the charter will be liable to pay the Owner a sum of demurrage.
Despite the number of delays around the world, no one expects the vessel to incur demurrage and the claims can become contentious, often dragging on for months and sometimes years. Added to this the charterer has often bought the cargo at the load port from a third party where there are laytime and demurrage terms in the cargo contract which are not normally back-to-back giving rise to an exposure that may not have been envisaged.
The trading behind the voyage often gives rise to delays in settling claims as the Charterer aims to collect his/her cash before passing money on to the shipowner.
How much is this worth?
For oil tankers trading on the spot, market demurrage forms 12-15% of their income with the lion’s share coming from freight earnings. It is the second sum in value and if not collected it could make the difference between a profit and a loss. It is important to note that these sums will be skewed depending on the spot market the vessel is trading in. For instance, the demurrage for operators of Tank Barges in the ARA region could be as much as 40% of earnings.
For the charterer buying and selling cargoes, it is the third-largest cost after the cost of the commodity and the freight. Interestingly, as the price for commodities and freight change, this third cost will fluctuate as a portion of the charterers outlay.
Read more about the demurrage rate of a VLCC when the market is poor – it never seems to fall much below USD20k even if the voyage itself is breakeven for the Owners.
This is big money, yet it is surprising to learn that many businesses, even today, run their demurrage exposure on a series of spreadsheets:
- One spreadsheet, or a standalone calculator to calculate the demurrage or despatch value
- Another spreadsheet to log the details of the claim itself and to track progress
The issue with the spreadsheets
- Accuracy – in a Forbes article it was estimated that 9 out of 10 spreadsheets contain errors, and this article by Incisive details ‘Horror Stories’ and the astonishing fact that ‘24% of spreadsheet formulas used by Enron contained mistakes’
- Security and safety – backing up spreadsheets can be difficult and haphazard
- Spreadsheets are often silos of information and difficult to share
- Having more than one user sharing the same spreadsheet often results in many versions being created and important data being lost
- Other than simple reports getting meaningful data is time-consuming and prone to error
- Managing and consolidating different spreadsheets from multiple users or regions is a headache and hard to maintain consistency of formats, layouts and so on
- Almost impossible to validate data being entered in spreadsheets
- Difficult to integrate with other systems and leads to data already held elsewhere being manually keyed in
Unfortunately, it is too easy for individuals to create their own spreadsheets, especially when their existing systems are deficient in some way. Spreadsheets pop up to plug these gaps.
The Alternatives to Spreadsheets
- Stand-alone laytime calculators – these programs simply provide the calculation and usually a laytime statement. Unfortunately, being ‘alone’ they do not offer automatic import of data or integration with accounts, trading, and credit control systems.
- Voyage Management Systems – these are large systems primarily directed at Ship Owners who manage Chartering, Operations and Demurrage. These offer features across all these functions and will not cover Demurrage in such depth as a specialist software program does. They may not be able to handle the complexities of multiple charterers and/or transhipment operations in a way that reflects your business and is aimed at Ship Owners they may not be suitable for Trading companies who have the added problem of recovering demurrage from their FOB sellers and CIF buyers.
- One System fit for purpose – Far better to have one place for everything and for it all to be connected. A system such as the Claims Management System (CMS) from HubSE allows users to link with existing systems to avoid manual input of data that already exists in one form. The whole process is contained in one place where you can:
- Monitor upcoming time bars
- See all aspect of the claim in one place – the calculations, the financials
- Place all documents
- There’s more but space prevents further details
The traditional role of claims departments is to process the claim and get the cash in the door as fast as possible. This is no longer good enough on its own. Switched on managements are seeing that demurrage is a significant cost or piece of income that needs much more attention. Clients want to know how to maximise these opportunities in the future by learning what went wrong in the past such as
- What sort of delays and duration can I expect at certain ports/berths?
- How many cents per tonne is demurrage costing? Is one product costing more than another? If so why?
- What clauses in the charter party or contract have cost money/lost income?
- What operational processes are causing losses?
All this information and more is available in a system such as CMS.
The time has come to discard your spreadsheets entirely.