Demurrage-denied ship owners looks to avoid hauling Indian cargo

P Manoj Mumbai | Updated on April 08, 2020 Published on April 07, 2020

Strap: Essential imports such as LPG and crude could be hit

Indian entities chartering ships have started inserting “special clauses” on demurrage charges into their contracts after the shipping ministry vetoed stake holders in the logistics chain including shipping lines from collecting such a levy due to delay in berthing, loading/unloading operations arising out of the three weeks lockdown aimed at combating coronavirus.

Citing it as a natural calamity, ports have invoked force majeure, a clause that absolves firms from meeting their contractual commitments for reasons beyond their control.

Ship owners may shun India trade to avoid losses from demurrage denials, potentially disrupting the supply chain of essential imports into the country.

To check a looming crisis, large charterers such as state-run oil refiner Indian Oil Corporation has given ship owners a choice; it has offered to pay half the normal demurrage rate written into the contracts instead of zero.

The oil refiner is making such an offer because otherwise it would be tough to hire a ship in the current freight market where the spot rates for a Suezmax tanker is about $75,000 a day while a very large crude carrier is quoting at about $170,000 a day.

In shipping, the charter party prescribes the number of days for berthing and discharge of cargo beyond which demurrage becomes applicable.

Demurrage is a rate negotiated between the two parties, either a premium to the market rate, if the market is high, or lower than the market. Most importantly, it is a commercial term negotiated between two parties in which the government has no role to play.

But, with no certainty on the waiting period due to the lockdown and no right to claim demurrage, ship owners are looking at avoiding carrying Indian cargo.

“This is quite an unfair situation for a shipowner and therefore no one would like to fix any vessels to perform any of the Indian trade henceforth. And, if they do, then they would build in the appropriate cost into their workings. It is also likely that most may just stay away. However, what is most concerning is that this force majeure clause could lead to huge disruptions in the supply chain of essential commodities for the country as India is very highly dependent on imports of LPG and crude,” said an executive with a top tanker shipping company.

“Waiting endlessly without any scope to charge demurrage is also an opportunity loss for us in a hot freight market for oil tankers,” he added.

This could possibly lead to an indefinite number of days of delay and charterers could even end up using the ship as storage without actually compensating shipowners accordingly, he said.

In the last few weeks, the demand for oil tankers have shot up significantly, mainly due to two reasons: one is the collapse in OPEC+ negotiations on crude output and secondly the demand slump due to the COVID 19 impact.

While on the one hand this has had a detrimental impact on oil prices because of the oversupply situation, on the other it has created a significantly increased demand for floating storage given the limited capacity for storage on land. Oil analysts estimate this surplus oil to be upwards of 15 million barrels per day.

As a result, spot rates for a Suezmax tanker have gone up to about $75,000 a day while a VLCC (very large crude carrier) is quoting at about $170,000 a day.

Published on April 07, 2020

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