When a bulk carrier arrives in Mombasa, after a long voyage of sea buttering in the inclement sea weather, the cargo importer is a happy person. One importer once jokingly told me how during the sea passage from load ports many thousands of miles away, he rarely had a good night sleep.

He would wake up at some point, wondering if the ship carrying almost half his entire life’s wealth of cargo, will get to its destination port safely.

Even though the ship is built to withstand and navigate through rough seas, many are the risks in the sea adventure, ranging from pirates to accidents and even fire; and yes, outright non-performance of the voyage by the ship owner also can happen.

Whether it is bread on the breakfast table, or fertiliser at the farm during the planting season in Kitale, or cement at a construction site in Upper Hill, in daily lives, we rarely link these commodities to shipping and ships.

Yet every day, at the busy port of Mombasa, these ships fully laden with a single commodity type like bulk wheat, make their end of sea passage call to the port.

The cargo importer, who either is a grain miller for example, would have paid through the appropriate negotiated terms the cost of the full cargo, the freight of shipping the cargo to Mombasa, and the insurance for the marine risk in case of any eventuality during the sea passage to Mombasa. Some risks are insurable and some just not insurable.-they become “own risk” to the importer.

Recently, I had the privilege to share a table with the CEO of one of the most respected global commodity trading companies. At any single day, his company has bulk shipments criss-crossing all the major oceans.

Freight rates

With his many years of experience in the commodity market, he shared his worries about the current low freight rates in the bulk sector, and the reasons why he did not want his company to pay lower freight rates currently being experienced in the bulk sector. That sounded a bit strange.

Low freight rates and charges are good for importers and exporters. That is very true, but that is also half the truth. Why? Lower freight rates lead to lower shelf prices of imported goods, like wheat floor on the supermarket shelf.

Lower freight rates also make our exports competitive in the international market, because the final shelf price of our exports in the overseas markets become competitive if the outbound freight rates from Mombasa are low. It gets a little bit more complicated than that sometimes, in the bulk commodity-shipping segment.

The dry bulk shipping market is a free market, mostly spot market, affected very much by supply and demand. The market is measured and reported daily by the Baltic Dry Index.

Historically, the market goes through a cycle almost every 15 years or so. The supply and demand of ships usually relates to the commodity’s supply and demand. Demand for shipping services derives from demand for commodities like grains, fertilisers and cement clinker.

When there are too many ships chasing few cargo shipments, the freight rates respond downwards as ship owners fight to outbid each other on the few available cargoes.

The reverse happens when there are lots of cargoes to be shipped all over the world and the ships find themselves having to choose only the most lucrative commodities and voyages. Then the cargo owners are forced to accept high freight rates to secure ships for their cargoes.

So why are low freight rates not always best to a cargo owner? Because of the current low freight rates, some ship owners have in the past two months wound up, put on receivership and some have seen their ships auctioned. Notable names are globally respected ship owners like Copenship A/S of Denmark , who have been regular callers at Mombasa Port.

In China, this week, the entire fleet of 20 ships belonging to Gongdong Lanhai Shipping will be placed on auction to repay accumulated loans and creditors’ outstanding amounts.

At the current low dry bulk freight rates, it is expected that more ship-owning companies will wind up as their cash flow gets tighter, especially those heavily financed by bank loans.

If you are an importer of grain, for example, how would news that the owner of the ship carrying your wheat worth $14 million to Mombasa has filed for bankruptcy resonate with you?

The lower the freight market, the higher the risks of voyage non-performance and other risks related to ship owners’ cash flow constraints.

That is why the major commodity trading companies are paying a bit more freight than the market rates and ship with only A1 (best classified) ship owners to reduce the risks attached to a low bulk shipping market. In exchange, the commodity cargo owners get long term loyalty and preferential rewards from the ship owners.

In a depressed freight market, ship owners would take the freight rates as dictated by the market, but usually, they will be running on a very tight budget, sometimes operating the ship at a loss.

Such are the times today. And in times like these, ship owners usually raise every possible and inconceivable reason to make an extra dollar out of the cargo owner after the voyage has commenced.

Ship owners’ claims to cargo owners tend to increase during low market time. Any claims by the cargo owners to the ship, for example, short cargo delivery at discharge port, or even dispatch earned for shorter port stay, tend to go unsettled because of cash flow constraints.

Source: Business Daily

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of TradeMark Africa.