Transportation / Shipping / Bulk Carrier Operating Models 4 comments

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World bulk trade growth has been accelerating since 2003 due to strong demand growth from emerging Asia and for those still in doubt, the figure below depicting the growth of world seaborne trade by type of cargo should be convincing:
















Note the significant change in gradient since 2003. That marks the new higher secular growth rate for overall shipping volume, generally speaking. Bulk shipping volume growth has been similar to this trendline.

To get a grip on the bulk shipping industry, it is useful to know the various bulker classifications (Capesize, Panamax etc) and also the various operating models for bulk shippers. The former is discussed in an earlier article ("Bulk Carriers"). The current writeup covers the latter, a topic which often confuses many.

Categorisation of Charter Types

The operating models issue deals firstly, with the various types of charter options on dry bulk carriers. It is important to understand them so that one can decipher the degree of impact that spot charter indicators like the Baltic Dry Index (BDI) have on the operating performance of a particular bulk shipper employing a particular type of chartering option on its vessels. The various charter types are described below:

Bareboat Charter - the use of a vessel usually over longer periods of time ranging up to several years. All voyage related costs, including bunker and port dues as well as all vessel operating expenses (eg. day-to-day operations, maintenance, crewing and insurance) transfer to the charterer’s account. The vessel owner is responsible only for the payment of capital costs related to the vessel.

Time Charter -- the use of the vessel for an extended period or for a trip between specific delivery and redelivery positions, known as a trip charter. The charterer pays all voyage related costs. The vessel owner of the vessel is responsible for the payment of all vessel operating expenses and capital costs of the vessel.

Spot Voyage Charter --- the carriage of a specific amount and type of cargo on a load-port to discharge-port basis. Most of these charters are of a single or spot voyage nature, as trading patterns do not encourage round voyage trading. The owner of the vessel receives one payment derived by multiplying the tons of cargo loaded on board by the agreed upon freight rate expressed on a per cargo ton basis. The owner is responsible for the payment of all expenses including voyage, operating and capital costs of the vessel.

Contract Of Affreightment (COA) --- the carriage of multiple cargoes over the same route and enables the COA holder to nominate different ships to perform individual voyages. Essentially, it constitutes a number of voyage charters to carry a specified amount of cargo during the term of the COA, which usually spans a number of years. All of the ship’s operating, voyage and capital costs are borne by the ship owner. The freight rate normally is agreed on a per cargo ton basis. Much of the dry bulk cargo that is transported by sea is moved under COAs and these COAs provide a more stable and secure income stream for bulk carrier owners.

The figure below illustrates the difference in vessel operating cost exposure accruing to the various charters for the vessel owner:











Several implications are:
- in the case of vessels trading on the spot market (whether under voyage or time charters) revenues are less predictable than long-term time charter revenues or COA revenues but may enable the vessel owner to capture higher margins during periods of improvements in drybulk rates
- bareboat time/spot charters will not subject the vessel owner to voyage expense risk (especially bunker fuel prices, or port congestion problems) while COAs and voyage charters might expose the owner to such risk (mitigated by fuel adjustments etc).

Vessel ownership

Self-owned --- The company captures all the benefits of vessel ownership, which can be significant in a rising spot market. The vessels are recorded as assets on the balance sheet and this constitutes valuable assets that backup the value of the company (can be re-sold on secondary market for good profits in a strong market). Similarly, in a poor market, the company can suffer badly as charter rates drop. It is a high operating leverage model highly dependent on charter rates. Companies like Courage Marine mainly utilise this model.

Charter-in --- The company does not own the vessels; instead it charters them from another owner for a certain duration (eg. time charter). Then it re-charters them out at higher rates, capturing the spread, or it utilises these chartered-in vessels for its own cargo transportation commitments (ie. COA contracts). It is less highly geared to charter rates because as charter-out rates (revenue) rise, charter-in rates (costs) also rise. However it can still be very profitable if the charter-in rates were secured during a down period and the duration is very long. It is also an asset-light strategy to maximise asset turnover. Larger shippers like STX Pan-Ocean and Noble rely heavily on the charter-in model.

References:
(1) Mercator IPO prospectus