Part 4 – The Market I

The Freight Market

The Cargos

Why Freight Rates Fluctuate

The Baltic Exchange

Baltic Exchange Indices

Overview of the Types of Charter

Laytime, Demurrage and Despatch

Return to Index

The Freight Market

The freight market is huge and complex with ship owners, operators and charterers at the mercy of fluctuating freight rates. Thousands of events can have an impact on the cost of sea transport and anyone moving bulk commodities operates in an extremely volatile environment.

Figure: UNCTAD Container freight markets and rates 2010-2017

The table above highlights the fluctuations in container rates over time and in the various routes from Shanghai. The chart below shows the container index kept by the Hamburg Shipbrokers Association over the same period:

Figure: The Hamburg Shipbrokers Association New ConTex Index, 2010-2018

Seaborne trade is vital in enabling the global economy to function. The world relies on the merchant fleet to carry every conceivable type of product. From grain to crude oil, iron ore to chemicals, the latest United Nations figures show that more than 10.7 billion tons were transported by sea in 2017 (Source UNCTAD Review of Maritime Transport 2018).


World trade is dependent upon the availability of adequate shipping capacity. At the beginning of 2018 the global merchant fleet size stood at over 94,000 vessels with a combined tonnage of 1.92bn dwt. Whilst the total size of the global fleet has grown over the last few years, the mix has changed significantly, reflecting changes in cargo types needing to be transported.

Figure: Share of world fleet in dead-weight tonnage by principal vessel type 1980-2018 (%)

The Cargoes

Vast amounts of fuels, foodstuffs, fertilisers, construction materials and other raw goods are moved by sea. Half of these cargoes are energy related – oil, coal and gas. Dry cargo accounts for over two thirds of seaborne trade volumes, Container traffic just over 10% by weight, but much higher in terms of value.


The growth of the world economy has seen a huge growth in the volume of seaborne cargo over the past 30 years:

# 5.7bn tonnes of dry cargo was moved in 2017, 3.2bn tons being iron ore, grain and coal. Other dry cargoes including bauxite/alumina and phosphate amounted to 4.4bn tons
# 3.1bn tons of oil and gas products were moved in 2017

Figure: International seaborne trade, 1980-2017 (millions of tons loaded)

Why Freight Rates Fluctuate

The Baltic Dry Index (an assessment of the average price to ship raw materials such as coal, iron ore, cement and grains, on a number of shipping routes and by ship size) hit a record high of 11,793 points on 20 May 2008. By 5 December 2008 it had collapsed to 663 points. It crashed in 2008 through a combination of factors, including a financial squeeze affecting Letters of Credit, debt levels affecting newbuild orders causing a number of bankruptcies, and a collapse in the price of commodities (the index stood at 1,646 on 1 November 2019).

The freight market is subject to a wide range of external variables, but it is fundamentally driven by the following factors:

# Fleet supply: How many different types of ships are available? Many bulk carriers cannot be readily converted to carry different cargoes, tankers being an example. As a result the bulk market is segmented and quite inflexible. How many vessels are being delivered and how many are being scrapped? The average age of vessels also has an impact – if it’s high then the market might expect a reduction in capacity, implying a rise in freight rates. Conversely, new capacity in terms of higher new vessel orders may trigger a reduction.
# Commodity demand: What are the levels of industrial production? Has the grain harvest been successful? Are the power stations importing more coal? How is the steel industry performing? Rather than commodity prices, it is the resultant volumes that impact freight rates. Sudden increases in demand, too quick for additional capacity to be built, will lead to surges in rates.
# Seasonal pressures: The weather has a big impact on the shipping markets from the size of harvests to ice in ports and river levels. Also the time of year, with global supply and demand of grain, coal and oil being different depending on where we are in the year.
# Bunker prices: With bunker fuel accounting for over one third of the cost of running a vessel, oil price movements directly affect ship owners. Surges in oil prices therefore push freight rates upwards, with the opposite happening when the supply of oil exceeds demand.
# Choke points/Geopolitics: This factor can particularly affect tankers with almost half of the world’s oil passing through a handful of relatively narrow shipping lanes. These points include the straits of Hormuz and Malacca, the Suez and Panama canals, the Bosporus and other important channels whose closure – either from conflict, terrorist attack or a collision in the overcrowded shipping lanes – can change the entire world’s supply patterns.
# Market sentiment: Because perhaps as little as half of the demand side is known in a timely fashion, market opinion affects the freight market just as much as the actual supply and demand of ships and cargoes.

Figure: Daily transit volumes(m barrels/day) through world maritime chokepoints (source US Energy Information Administration, 2016)

A good example of extreme rate fluctuations came in October 2019, which saw a surge in tanker rates following US sanctions being imposed on various subsidiaries of the China state-owned COSCO group, which operates more than 50 super-tankers. This action followed alleged violations of the US sanctions imposed on Iran. At the same time the market was digesting the news of another Middle East tanker attack as well as a typhoon in Japan. The result of “a frenzied scramble to secure tonnage” – on fears over the availability of capacity – was the highest shipping costs seen in 15 years, with VLCC rates soaring to US$300,000 rate per day.

Figure: Impact on VLCC rates following US sanctions imposed on COSCO

The Baltic Exchange

Baltic Exchange members are at the heart of world trade, arranging for the ocean transportation of industrial bulk commodities from producer to end user. The bulk freight market relies on the co-operation of shipbrokers, ship owners and charterers to ensure the free flow of trade.


Baltic Exchange shipbrokers undertake to abide by a code of business conduct – the Baltic Code – based on the motto “Our Word Our Bond”. The Code has been adopted industry wide as the compliance standard for market practice and is regularly quoted at arbitration and court hearings – and those who breach the code will damage their reputations as well as expect to be disciplined or expelled.


With a total membership of around 650 companies, the Baltic Exchange has a growing membership base in the USA, Europe and the Far East. It is headquartered in London with offices in Athens, Shanghai and Singapore. Its roots go back to 1744 and coffee houses in Threadneedle Street, where merchants and captains would meet to exchange news.


Membership of the Baltic Exchange is not just limited to shipbrokers, charterers and shipowners, but also includes financial institutions, maritime lawyers, educators, insurers and related associations.


The Baltic Exchange – a purely historical name as it is neither an exchange nor is it based in the Baltic – is a company limited by shares, that was owned by its shareholders, most of whom were member companies. In November 2016 it was acquired by the Singapore Exchange.

Baltic Exchange Indices

The Baltic Dry Index (BDI) is an economic indicator issued daily by the Baltic Exchange. Not restricted to Baltic Sea countries, the index provides “an assessment”, produced by panels of designated brokers, of the price of moving the major raw materials by sea. Taking in a number of shipping routes measured on a time charter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.


Apart from BDI, there are other Baltic Exchange indices, covering both dry and wet freight, e.g., Baltic Dirty (i.e., crude oil) Tanker Index, Baltic Clean (i.e., refined products), Tanker Index, etc.

Overview of the Types of Charter

There are 4 main types of charter, i.e., on what terms and conditions a shipper employs a ship for a specific transport job or period of time. Although based on some standard forms, in reality, each charter type has a long list of clauses that can be negotiated between shipper and ship owner/operator.


Voyage charters are where the ship agrees to go to port A to load a cargo of an agreed quantity of a commodity and carry it to port B. The consideration will be a rate of freight probably calculated on a per ton basis. A shipper may also agree with a ship operator to make a series of consecutive voyages with the same ship.


Contracts of Affreightments (COA) are contracts which are preferred by shippers in cases of very large quantities of a cargo where multiple ships may be employed to cover, in multiple voyages, a pre-specified total quantity of cargo. In such cases the method would be for the charterer and owner to agree parameters covering the frequency of loading, the ranges of the sizes of ships to be employed and the total quantity to be lifted within a given period.


Time Charter is a contract based on time. It is usually preferred when the charterer’s commodity is drawn from a number of different places and sold to several buyers in different locations. It’s an especially useful type of contract if there are marked differences in the speed of loading/discharging at the different ports involved. In Time Charters, the ship owner still remains responsible for the running of the vessel, e.g., crew, but the commercial direction of the ship is transferred to the time charterer. He now decides where the ship will load/discharge, where to re-fuel etc.


The time charterer pays port expenses and bunker fuel costs. One more advantage of Time Charter, is that, unless it is extremely restrictive, if the charterer’s own business does not require the ship for any part of the period, he can sublet it either on a time or a voyage basis to a third party.


Bareboat charter transfers the entire job of operating the ship to the charterer. It is fair to equate this to the original owner “abdicating” from his responsibility.  The bareboat charterer effectively acts as the owner. In most cases, a bareboat charter is like an alternative way of financing where the charterer finds it more convenient or beneficial to pay a monthly hire out of revenue rather than raise the capital to buy their own ship.

Laytime, Demurrage & Despatch

In commercial shipping, laytime is the amount of time allowed (in hours or days) in a voyage charter for the loading and unloading of cargo. If the laytime is exceeded then demurrage is incurred. If the whole period of laytime is not needed then despatch may be payable by the ship owner to the charterer, depending on the terms of the charter party (despatch does not apply to tanker charters).


Demurrage is a penalty to the ship owner essentially relating to port congestion which can be caused by weather (although weather days often do not count towards demurrage calculations for the ship that is berthed, however knock on delays can count for other ships thereafter), too many ships arriving at the same time, industrial action, geopolitical events, acts of God etc.

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