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Shipping is the backbone of international trade

According to UNCTAD, over 80% of all trade is transported by cargo ships. Over the past few years, however, we have seen increased macroeconomic and geopolitical tensions that have caused supply chain disruptions, directly impacting the shipping industry.

To help demystify some of the greatest challenges facing the shipping and freight forwarding industry today, Trade Finance Global (TFG)’s Deepesh Patel (DP) spoke with Director of HR Maritime, Richard Watts (RW).

DP: Maritime disruption, or what many call ‘the end of the big boat era’ is the flavour of today’s conference at Commodity Trading Week. We’ve seen huge reductions in volumes that the Panama Canal can handle due to extremely low water levels, port congestion in places like Long Beach, a continuation of the Red Sea crisis leading to 10% increased transit times and CO2 emissions, and many other shipping challenges. How do these supply chain woes impact commodity trading?

RW: Shipping is a very big part of commodity trading. But, when you look at the transportation of goods around the world, the amount of time it actually takes to move goods from A to B doesn’t really matter that much, as long as the supply chain is well-planned and well-organised. 

It’s when things don’t go as expected that you have a major issue. 

We saw the disruption within the Suez Canal, where the Evergiven given got stuck for six days in March 2021. That isn’t a particularly long time, but it became a massive problem for shipping because vessels had to start deviating unexpectedly. 

We’ve seen more and more disruptions over the last couple of years. It may be that global supply chains have become dependent on increasingly delicate systems, but as a result of these disruptions, we are starting to see many trading companies build more robust systems and incorporate contingency plans into their supply chains. 

Take some of the current shipping disruptions that we are seeing now in the world – like the Red Sea or the Panama Canal. These are situations that we have now been able to calculate for and, for the most part, we know how to handle them. 

If a vessel can’t go through the Red Sea, then it can still go around the Cape of Good Hope. If it can’t go through the Panama Canal, it can still go around the Magdalene Straits. 

As long as we know about these in advance, we can make the necessary plans and adjust our supply chains accordingly. Where the big problems arise is with unanticipated disruptions.

For example, if we were to suddenly see the Strait of Hormuz closed tomorrow, then the world supply of oil would nearly get cut off overnight, which would cause major issues. 

DP: For vessel operators, buyers and sellers, and those involved with maritime transport, understanding contractual obligations and wording is absolutely key, especially when things go awry. Dali’s recent collision with the Key Bridge in Baltimore is one example of this. How can we ensure that contractual obligations are tight when accidents such as this happen?

RW: The problem is when everything goes right, you don’t really need a contract because everyone is happy. It’s when things go wrong that people start laying blame and pointing fingers, which is when you need to start identifying what the contract actually says. 

Unfortunately, this is when a lot of people start looking at the contract and realise that it’s not anywhere near as accurate as it should be. But there are also a lot of times when people don’t actually understand what is included in the contract. 

I had a client who recently shipped cargo from Asia to the US east coast and their vessels would always go through the Red Sea and the Suez Canal. In January, just after the attack started happening and vessels started deviating, this particular ship owner also decided to deviate. 

The question became: who was responsible for paying for that added voyage? 

In this case, since the contract didn’t say anything about who would be responsible for this, there ended up being a dispute with the ship owner.

It’s important to realise that it really doesn’t really matter who you agree will be responsible for something like this – because it will ultimately get priced into the contract anyway – what matters is that it is clearly determined ahead of time. 

DP: Why is it important to understand for trading companies to understand their shipping positions with respect to Incoterms? Can you give any case studies? I’ve heard the Ex Works is a pretty bad Incoterm to use.

RW: The Incoterms are really the foundation of our business and are one of the most important aspects of what we do on a day-to-day basis since they determine some very important aspects of our contract. They determine where risk is transferred from one party to another and who is going to pay for what costs. 

But its important to realise that there is plenty they do not determine. For example, Incoterms do not govern the transfer of title, they do not determine when payment must be made, and they do not cover a lot of other areas that people tend to assume they do. 

This is why it’s important to be very clear about what is covered under the Incoterms and to avoid using what we call ‘hybrid Incoterms’, where we take one Incoterm and stick it onto another. 

For example, I’ve seen people try to use something called ‘FOB + Freight’, instead of the correct ‘CFR’ (Cost and Freight). I’ve also seen ‘FOB + Freight Delivered at Destination’, which doesn’t actually have any meaning at all. 

And I even saw a contract recently that called for ‘DES’, which is an Incoterm that doesn’t exist under the latest rules. Does that mean ‘DES’ as per the latest set of rules when it existed? Does it mean the replacement to DES now, which would be either DAP or DAT? When there are multiple interpretations, if something goes wrong in the shipment, it will almost certainly end up in a costly dispute.

To be effective, these things need to be clear within the contract.

DP: Sanctions regimes are hard to keep up with, particularly for cross-border commodity traders. Can you give any examples of why it’s important to ensure you’re compliant, and what could happen if you’re not?

RW: Over the last 20 years, sanctions have become something that’s more and more important to pay attention to. 

Today, it can destroy a company to be in breach of sanctions. Take BNP Paribas, they ended up suffering a $10 billion fine because of sanctions and ended up closing down their trade finance business. 

Trading companies have also realised the consequences of this. In terms of the different sanctions themselves, it’s a question of what your exposure is and what you’re involved with. Some companies take it more seriously than others, but they all should take it very seriously. 

A few years ago, I had a client who had loaded cargo of bitumen from Dubai. The problem is that Dubai doesn’t export bitumen; bitumen comes from Iran. The shipping documentation, which was written in Farsi, ended up in a bank where the employees were Arabic-speaking, making it obvious that something was awry. 

At the time the bank dealt with this directly with their client, and it didn’t end up in the hands of the regulators, but today it would. 

DP: Demurrage charges are another complex yet important topic to understand. Why must charterers understand these risks and their positions?

RW: Demurrage is important to understand for the sheer amount of money that can be involved. 

I was dealing recently with the situation of a large oil tanker, where the penalty for delay was around $100,000 per day. In this case, the intended loading couldn’t occur because of an issue with negotiations, and they had to find a different terminal to load from.

Ultimately, the vessel waited 27 days before loading, costing around $2.7 million. 

Even if you feel comfortable that your counterparty is responsible for the delay – perhaps because there’s a contract that says they are – the question is would you be able to enforce it? Can you actually get that money back from your counterparty even if you win a dispute? 

DP: What are your top tips for commodity traders when it comes to avoiding some of the biggest risks when it comes to maritime transport?

RW: One of the main tips I would give is that if it looks too good to be true, it probably is. 

Don’t chase those business opportunities that promise to make you a quick fortune because it’ll probably be more trouble than it’s worth. 

I would also say the devil’s in the details, so make sure that you are careful. We often say that you make your money in trading and you lose it in operations. You don’t need to, but it’s very easy to lose money in the operations side of the business. 

A wonderful PnL that’s lost through operations still ends up a loss.