Ship Operating business

Survival in difficult times

1) OPERATORS ROLE IN SHIPPING

2) RISKS UNDERTAKEN BY OPERATORS

3) RISK MANAGEMENT

4) CONCLUSION

OPERATORS ROLE IN SHIPPING

Ship Operating Business

• Operating Business is nothing but providing a commercial freight solution by an owner/operator encapsulating all underlying risks in a shipment . Mainly engaging an owner and a charterer. • Complex Process involving various counter parties and

a very knowledge intensive business – No room for short cuts.• Operators neither own assets nor any cargo hence are

completely exposed to the external factors which are by and large outside his control thus risking his investment purely against the adverse forces prevailing in the market.

RISKS UNDERTAKEN BY OPERATORS

Underlying risks- Pre-Fixture Risks• Market Risk- Supply and Demand

• Counter Party Risks – Right Owners and right Charterers• Risk arising due to NYPE CP & Gencon CP. • Managing “assumptions” risks – Hedge

management - Bunker and Charter Hire • Human Risks- Constantly recruiting , training and

building up a right trusted team • Escalation effect – Miners/traders default / owners

default • Financial risks- Credit and Cash flow management

Underlying risks- Post Fixture Risks

• Operational excellence with SOP in managing communication with vessel, owners, charterers , agents , shippers and receivers from delivery until re-delivery. • Managing errors committed in Pre-fixture –

Technical and legal expertise , if reqd• Hire payment and no overpayment – Strict policy

and procedure / checks• PDA payment and collection • Lay time calculation, agreement and collection

• Bunker stem – Credit with T & C • Escalation effect – Miners/traders default /

owners default • Finalization – FHS and FFI • Transparency – IT Solution like

softmar/shipnet/danaos etc• Financial risks- Credit and Cash flow

management

RISK MANAGEMENT

Risk Management Elements• Client/Charterers/ General details:

• -Sound Background? Financially stable?/ Bimco checked/ known authority ? Comfort level?• - Is due diligence done and approval received

from BOD?• -Is the cargo firm/ sub sale /tender/ probability

of sub ?• -Cargo spec/ grade checked ?• -Draft CP seen ? Any lifeboat/ escape clause ?

• Port info - Load port / discharge port details / prevailing

weather checked ?- Any draft / loa/ beam / special requirement

checked ?- Any discussion needed with port agent for

further details or congestions / facilities etc

Owner/vessel related checks: Owners ref/sound financial trustworthy –background

check done?- Officers/Crew nationality permitting the business ?*- Vessel has required grab/sufficient power/number of

mooring ropes?- WLTHC/ De ballasting capacity suitable ?- Standard warranty clauses accepted by owners?- Laycan with owners/charterers/margin between two

laycan- Cancellation clause with owners and charterers- Itinerary received from owners/Doubly checked from

own source of agents including congestion/weather.- Last cargo on board along with quantity/discharge

rate/when to be free

- Hold condition/checkout the ventilation (if necessary)

- Owners bank account details and PIC name- Owners P & I Club, H & M Value- GA/Arbitration place/law? Certs valid/any PSC/COC

pending?- LOI/Switch B/L (if required) /force majeure clause- Right ship approval checked (if required) /COFR on

board if calling USA

Voyage planning/Calculations:

- Route Planning done/Safest/Shortest route considered ?

- Loadline zone/Cargo intake ascertained-Summer/tropical/winter

- Water density lp/dp and stowage factor of cargo checked in respect of available cbm

- Any restrictions of LOA /Beam/Air draft/tide/pilotage/waiting /hugging the coast line/HRA

- Loads/disport stay /Delays causing bottom cleaning/polishing/time/cost

- D/A bends cross checked? Any latest revision?

- Demurrage sufficient to cover standing charge including idle bunker?

- Latest Tax clause including service tax checked?

- Weather conditions checked/How many rough days/sufficient safety margin kept?

- CP Holidays considered at LP/DP?

- Other factors i.e AGM/Piracy zone(Additional cost)/GOA/Ice breakers/Canal crossing and delays incorporated in calculation?

Bunkers:

- Bunker prices crosschecked/Source?

-Vessel BOD sufficient to proceed to plan bunker port? ISM compliant quantity always on board?

- SECA zone bunker any requirement?

- In case on TBN/fwd booking – Bunker cost taken as paper/swaps in calculation?

- Is the bunker cost and bunker hedging program discussed with the bunker hedging PIC?

Coastal

Voyages:

- INSA NOC been obtained by the sub charterer?- Is GTL on board?- All documents/certs as per SVL requirement with

annual endorsement.- Sufficient time taken to obtain SVL ?- Check if last voyage of the vessel was a coastal

voyage- Check vessel flag/crew/P & I before fixing- Check for holidays

Cargo specific checks (quick checks) a)Iron ore fines/concentrates/pellets:- Check cargo density especially fines of 2.8 cbm PMT and

the vessel gears/grab suitability.- Check TML/FMP Clause with owners/Is CAN test report

available? - P & I survey charges considered in the voyage cost

sheet?- Check with port/agents regarding any cargo

condition(Cargo covered or not in monsoon)? How long cargo lying ?

b)Steam coal/coking coal/met coke/pet coke:- Cargo density/SF specially for met coke/pet coke- For Indonesian coal , find out how long cargo stayed in

open/Water sprinkled/any hidden fire expected?- Sufficient ILOHC taken?- Cleaning chemical available on board?

c)Cement clinker/limestone/furnace slag/gypsum:- Check cargo density with charterer and the

loading/discharging process- Gears/Grabs suitable for the business?- Is the slag likely to de-colourise? Check with agent.

d)Similar cargo sets viz bulk grain/wheat/SBM(Slack hold/ Healing moment to be checked to avoid bagging/strapping) likewise

• HBI/DRI/Steel pipes/billets/HRC grouping and• fertilizer grade Urea/MOP/DAP/Rock phos etc and

another group of • salt/sulphur where lime washing cost and timing to

be checked.

e)Market Evaluation (TBN Call etc):- Trend and seasonality for TBN Call- Area/Cargo specific seasonality checked.- Historical data on load/discharge rate.- Vessel availability?- BDI/Spot/Forward index- Any hedging plan- As a stand by two LL considered?

- (A summary of the expected returns from the business is noted at the end)

Risk Management – Classic Examples

• Owners related – • Particular Vessel – Chinese vessel called at Chittagong

– Local navy on board and cant allow discharge despite two times vessel been in chartered with us …. Allegation that it has got some north Korean connection • What to do ???• One vessel stuck at Zhoushan due to owners have no

money – Vessel fixed with us two times in past.

Risk Management – Pre-fixture

Counter Party Risk – Charterers related• Escalated Risks- Miner default/ Traders default –

One vessel at Indonesia – Miner can’t get export clearance due to royalty payment • Goa Loading – Indian Charterer- Vessel cant

load ,TML issue • One charterer – Don’t have cargo while vessel

arrived load port – RBCT

Risk Management – Pre-fixture

Hedge Management • Swap/ Options- Call & Put / Collar – Bunker • FFA – Charter Hire ( Requires a clearing bank, Clearing House and a Broker with margin management )

Risk Management- Pre-Fixture Human Risks- (No Assumptions within Assumptions )

• To have a good P & I Club with good solicitors team to defend • PDA• Bunker estimate vs Stem – Cancellation

/Unavailability – RBCT / Colombo despite hedge management • Shex eiu vs Shinc• Bad Wx• Sea Margin• CP holidays / Local Holidays • CP clause – Mutual in Nype for off hire settlement or

for underperformance• Deductibles and LMAA cost

Risk Management- Pre-Fixture

Credit and Cash Flow Management - Depending on duration of voyage , counter

party and CP terms on collection

Risk Management - NYPE and Gencon CP –Comparison

• GENCON(1922/76/94)

• Payment of freight(14)• Laytime(16)• Cancelling clause(9)• Owners

responsibility/Warrant clause.(2)

• General strike clause(16)• IF VESSEL IS LOST - Freight

deemed earned upon completion of loading discountless and non returnable vessel and or cargo lost or not lost(4)

• General Ice clause(18)• Stevedore clause

• NYPE(1913/21/31/46/81/93)• Hire payment terms(11)• Delivery/redelivery(2,10)• Delivery/Cancelling(16)• Owners

responsibility/Charterers to provide.(Line 64,1981)

• No such clause is found in preamble

• IF VESSEL IS LOST- Owner to return the paid charter hire to charterer for the period vessel lost when the advance hire is already paid

• Ice clause(33)• Stevedore damage

clause(35)

CONCLUSION

Conclusion – Survival Strategy for Head owners

Reduce operating costs and increase efficiency. Seeking creditor leniency as market seems to be re-

bounding . Restructuring loans, credits with banks and lenders on. Acquire 2nd hand vessel as a means to average out their cost

and also broaden market share. Balance undelying risk taking some cargo contracts Take

vessel out from pool as market imporves to take advantage of market

Scrapping of older tonnages, usually older tonnages cost more to operate because of high maintenance, new ballast requirment and sox/nox reqts.

Conclusion –Strategy for Charterers

To Hedge their long term underlying freight risk with COA prior market can get really high

Manage their cash flow and use FFA as hedge management

Conclusion- Survival Strategy for Operator

• Detail Risk Management Check List • Hedge management • Strict Counter party checks and Diligence

Cum approval system • Authority matrix • Oprerators not to Just jump in the fray for the

sake of volume generation. • Company culture-constant care • Strong technical, commercial and legal

understanding and implementation• Forming pool among interested parties to

reduce competition

• Opting for super eco tonnages on short/long term period and parallel do the profitable spot business.• Good Club and Solicitors to advise on W/P basis • Changing gears as per market-Taking position on

vessel • Trust and Confidence based on performance and

delivery- Relationship • Diversify into allied business like tankers, RO-RO

etc to balance the cash flow and riding the experience curve• Branding-delivering values and creating an impact• PWSL – Last but not the least - PWSL -As a freight

partner

Thank You !