European traders, shipowners at odds over new SECA fees in charter-party terms

2015-01-13

As the implementation of new shipping Sulfur Emission Control Areas, or SECAs, comes into effect this year there still appears to be no emerging market standard on how freight rates are to be incorporated into charter-party agreements.

Since January 1, ships sailing in designated SECA zones, which includes Northwest European waters and coastal US waters, have only be allowed to burn fuel with a 0.1% maximum sulfur limit, down from the previous 1% sulfur cap, as per the latest International Maritime Organization regulations.

In anticipation of this new regulation, in October last year the Worldscale Association, which publishes freight rates for all major shipping routes, published a fixed differential of $48.35 per mile to represent the cost of burning 0.1% gasoil within the SECA zones compared to the 380 CST fuel oil grade delivered basis Rotterdam used to calculate Worldscale flat rates.

However, a lack of clarity as to how in practice the calculations would work discouraged many year-ahead freight negotiations between shipowners and charterers, casting uncertainty over the market.

But with the obligation of abiding by the rules, traders, brokers and shipowners alike have been finding novel ways to negotiate the additional costs of burning lower sulfur fuel into their charter contracts.

Questions remain, however, over what those costs should be and who should carry the burden.

0.1% ARA gasoil barges were assessed at $469.75/mt Friday, a $233/mt premium to the 1% ARA fuel oil barge market. The difference in costs is significant and will have a big impact on traders’ bottom lines, according to trade sources.

RATE APPLICATION

The fixed differential calculated by Worldscale represents the differential per mile cost of burning 0.1% sulfur fuel oil compared to 3.5% 380 CST delivered fuel oil, based on average global prices for the two grades during the period October 1, 2013, to September 30, 2014, as assessed by LQM Petroleum Services.

Valued at $305.94/mt, the differential is converted to a dollar/mile cost, assuming an average service speed of 14.5 knots and steaming burn of 55 mt/day, of $48.35/mile.

The differential is calculated to gauge the cost difference between 0.1% fuels burned inside the Sulfur Emission Control Area and the 3.5% fuels that can be burned outside the zone.

However, since that point the premium of 0.1% gasoil to delivered 3.5% fuel oil has fallen significantly, averaging $267.50/mt over Q4 2014 from $326.45/mt over the October 1, 2013, to September 30, 2014 period, according to Platts assessments.

Last Friday the spot market differential was assessed by Platts at $227.25/mt, its lowest since September 2010.

This translates to a spot per-mile cost of $35.92/mile, $12.44/mile below the calculated Worldscale differential.

While it was largely expected that the published rate calculated by Worldscale might not be used in deals, the large deviation in value between the spot market value and the published differential has added another risk to trading cargoes already on the water, traders said.

“It is early days, but we have done some deals above the SECA fee rate, and others below the published value,” one market source said.

Other traders were heard to be incorporating the cost of burning 0.1% gasoil into the Worldscale multiplier, rather than apply it separately as a fixed differential over the flat rate, which is the fixed fee determined by Worldscale on an annual basis for a voyage from one port to another.

SWITCHING ISSUES

A second point of contention has been negotiating the proportion of the route liable for the SECA fee, as not all vessels are able to switch readily between fuel grades when chartered for voyages inside and outside of the SECA zone limits.

For example, a ship traveling from the Russian Baltic port of Primorsk to Bordeaux in France will go in and out of the SECA zone, which is centered around the British Channel, but may not be able to switch fuels during the voyage.

“Some Flexi-sized vessels do not have the ability to change fuels. [For a Baltic load] they will have the same costs if they stop in Brest as if they stop in Bordeaux. [Because] they can’t switch back to 3.5% fuel oil we think the fee will apply in or out of the zone. They [ship-owners] will say from Brest [to Bordeaux] we will go with a higher Worldscale [rates, to cover the cost of continuing to burn 0.1%],” one trader said.

“For [larger] US ships, though, the switch won’t be a problem; they can run on more tanks,” he added.

A second trader said: “Certainly for smaller 10,000-12,000 mt sized cargo vessels if you have to burn within the SECA zone you will have to burn on the whole route even if you go outside of the zone… I think Handys can change, Flexis are the unknown, big vessels can have both.”

RETURN JOURNEYS

Charterers and shipowners are also at odds as to whether a single leg of the voyage or a round trip should be subject to the fee.

Vessels chartered on a spot basis are always charged for return journeys, even if charterers only have a cargo for one leg of the journey.

Worldscale’s flat rates are also calculated taking into account the return journey.

However, several shipping sources and traders said that so far some of the negotiations applied the SECA fixed differential to only the laden part of the journey and not the return.

“The fee will be negotiable on a fixture-by-fixture basis, it may not apply on the round trip, it may be negotiated for a laden portion only,” said one shipping source.

“I would say they [traders] will try to push for the laden leg only, but if the voyage has a long ballast the owners will be reluctant to do that, the cost will be too big,” said a second source.

As the chartering deals continue to be negotiated, market participants appear to be pushing for a standard market practice to be found, with some traders vociferously asking to include the freight differentials in the negotiated Worldscale rate.

“For us it has to be included in the WS rate, we need support from others but right now there are 100 different ways of doing it, and it is very unsafe,” said a third trader.

Source from : Platts

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