[INFOGRAPHIC] Ship chartering: 6 mistakes made by charterers and how to avoid them

  • 14/02/2019
  • 13 minutes

The act of hiring a ship to operate it or to load it is a complex task. This operation is carried out through a charter party, which involves a series of nuances and details.

You can also listen to this article in the audio version.

Specific knowledge is necessary so the maritime transport of exclusive cargo, or cargo that’s not suitable for regular vessels, can occur without problems. Some mistakes can lead to great losses!

But how to successfully conduct a ship chartering, after all? We’ve talked to Márcio Campos, a shipbroker at Navicorp, and he listed the 6 mistakes made more frequently by charterers. Check it out!

The responsibilities of a charterer

The charterer must be capable of comprehending maritime processes in order to guarantee that a chartered ship be able to meet all its deadlines. “This differential allows subsequent problems, be it due to being in a rush or to a lack of attention, to be avoided”, alerts Márcio Campos.

The responsibility of guaranteeing that the mandatory documentation for maritime transport is complete also falls to the one that rents a vessel. But their tasks don’t stop there. The shipbroker highlights that “knowing about the restrictions to the boat’s size in a certain port is also a responsibility of the charterer”. When it comes to chartering, this element makes all the difference.

The charterer, therefore, must know the bureaucratic processes, as well as the loading and unloading ports that must be looked for. It’s through this attribute that he or she will become aware of if a certain vessel fits the technical limits of the port. This means:

  • knowing the restriction of the draft;
  • having an idea about the port’s depth;
  • understanding if a ship can enter the port;
  • knowing if the vessel can operate with partial cargo;
  • knowing the cost of the canals.

It’s also a responsibility of the charterer to make an estimate of the whole journey, without ignoring any cost and any characteristic of the vessel or of the port! Only then it’s possible to avoid some of the main failures that might be caused by charterers. Learn about them now.

6 main mistakes made by charterers

Chartering can happen for only one ship, called a voyage charter, or for a period of time, when it’s labeled a time charter. Be that as it may, the charterer must be prepared to make the right choices.

From this moment on, we’ll list the main errors made by charterers. Check it out!

1. Not paying attention to market issues

The person who is chartering a ship must be aware of the market levels, that is, of the price of sea freight shipping. After all, shipping is considered a commodity and it experiences volatility.

The chartering professional has to keep an eye on what’s going on in the market. Therefore, it will be possible to identify the best moment to issue an order of need or search for a ship, as well as putting cargo on the market and buying or selling freight shipping.

2. Not knowing their counterpart

In chartering, it’s fundamental to know your counterpart, that is, the one you’re negotiating with! For that to happen, doing a credit check is essential. That means evaluating the financial capacity of the company that’s being hired.

By acting in such a way, if a problem arises during the journey itself or the chartering, there is a guarantee that the hired company is fully capable of carrying on with that contract. Márcio Campos reminds us that “many charterers are used to ignoring this kind of credit check, which might lead to a problem in the future”.

3. Making mistakes when calculating the loading and unloading boards

The charterer must pay attention to the boards and to the loading and unloading rhythms, as well as to the length of stay, possible occurrence of holidays, and other details that might lead to an excess of demurrage — all in all, he or she must manage the risk.

Demurrage is like a contractual fine applied to the charterer that uses a ship for longer than what was accorded, and runs over the loading and unloading deadline. This fine is paid to the shipowner. Likewise, the shipowner might pay the despatch to the shipper, which is what happens when a vessel is released before the deadline established on the charter party.

4. Rushing when it comes to the closing of the deal

The charterer must be able to identify the moment in which he or she truly has a done deal. In general, when someone charters cargo or a ship, there is a negotiation of the main terms, in which are inserted the subjects — the conditions that must be followed.

See some of the possibilities which might appear on the subject:

  • vessel’s approval;
  • charter party details, when negotiation hangs on the parties closing a deal on a bigger contract;
  • board of directors approval, which means the one who is buying that shipment will have, for example, 24 hours for their director to confirm the deal.

Therefore, up until the moment when all observations are finalized, the charterer doesn’t have a contract. Márcio Campos points out that “while the charterer is on the subject or in a certain point of the main terms, technically, any party can run away from the deal”. Keeping the economic aspect in mind, sea freight shipping is a commodity and the market might go through volatilities, leading the shipowner to try and run away from the negotiation.

Likewise, a charterer that has agreed to a US$ 10 shipping can give up on the deal if the market collapses and the price falls down to US$ 8. To the shipbroker, “this is neither elegant nor usual, especially in companies that have a constructive, positive relationship, but it can happen”.

5. Not reading the details of the charter party

A charter party, contract also know as a chartering letter, must be observed in all its details. Nowadays, it’s common practice for the charter professional to receive legal advice when it comes to big companies — which will provide orientation in relation to clauses that are fundamental for the company. All in all, not paying attention to those details in the contract is a big mistake!

Ethics and anticorruption clauses are of great importance and must be privileged. After all, in a manner, they filter the quality of the counterpart with whom you’re working with. Remember that the charter party contains information about rent, demurrage, and even despatch, mentioned previously.

6. Disregarding the importance of the shipping agent

In order for all the mistakes listed above to be avoided, the charterer needs to count on the shipping agent. A good shipping agent is fully capacitated to orient the charter professional. “He or she is the one who will keep the professional up-to-date with the most realistic port costs and port restrictions, talk about arrival queues for the vessels, and position you about the ship you hired or the ship you’re operating: when it will dock, when it will leave”, reminds Márcio Campos.

What does it take to be a good charterer

Now that you know what not to do in ship chartering, check out some characteristics which are the differentials of a good charterer:

  • keeping up-to-date with the fluctuations of the international market;
  • dominating the operational dynamic in the ports;
  • being judicious when choosing shippers;
  • evaluating the credibility of the shipowner and other professionals involved in sea freight shipping;
  • counting on a broker who is able to explain and to unravel the maritime transport vocabulary;
  • counting on the help of a shipbroker.

The professional responsible for ship chartering must be highly engaged with the politics of transport and with the focus on results. Therefore, the margin for error should be null!

Most Used Terms in Maritime Chartering

See how ship chartering has many peculiarities? Now, understand how hiring a shipping agency guarantees effective and less costly operations!