Are barge demurrage rates outdated?

Demurrage rates in inland barging are primarily linked to the TTB (Tankschiff-Transportbedingungen), a document containing terms and conditions for the inland barge market that has remained unchanged for nearly 14 years. The economic landscape changed, the market is constantly changing as well, yet demurrage rates stayed the same.

At the time of the first edition's publication, the demurrage table listed barge sizes up to 5,000 tons. In subsequent years, larger barges were constructed, but the document has not been updated since 2010. The demurrage rates for the sizes thereafter are extended as in the sheet of 2010 with 20,- euro per 500 tons.

GT&C’s

Two other primary terms and conditions used in inland barging with other demurrage rates are BP Voyage Charter Party (BPVOY) and BCG’s (Total General Terms & Conditions).

Exxon’s EMVOY 2013 and Shell GT&C’s refer to the TTB lay-time and demurrage conditions.

The main difference is that BPVOY and BCG’s determines the demurrage rate based on loaded tonnage, whereas TTB looks at the size of the barge to determine the appropriate demurrage rate.

While the general legal terms of the agreement are typically fixed, demurrage rates can be negotiated. For instance, parties may agree to use the BCG’S terms for the fixture but apply demurrage rates from the TTB agreement or set a fixed demurrage amount negotiated specifically for that fixture. Negotiating these terms are depended on market conditions.

When a time charter is sublet to a third party, the initial price per ton or lump sum may yield a reasonable profit. However, negotiating unfavourable demurrage terms can still result in a loss for the trip. If the agreed demurrage rate is lower than the daily cost or price you pay for the barge, and is waiting for a multiple days or longer for loading or discharging, the initial profit can be entirely eroded and even turn in a loss.

Deep see shipping

In deep sea shipping, it's common to fix freight rates on a daily rate or lump sum. Demurrage is based on the daily rates, time charter equivalent or are negotiated, based on market conditions.

In contrast to inland barging, where rates are typically based on euros per tonne and demurrage rates are usually set by TTB, BPVOY, or BCG’s. Sometimes being negotiated but is not a common practise. Particularly barge demurrage negotiations—rarely consider market conditions.

Scenario's in barging

While freight rates are subject to sharp fluctuations due to market influences, demurrage rates in barging, like in deep sea, could follow a similar pattern. Demurrage rates in deep sea shipping typically do not reach the extreme highs and lows observed in freight rates, but increase or decline with more moderate peaks and troughs unless a day-rate has been agreed.

Examples strong markets

Consider a busy barge market where the rate is, for example, 6 euros per ton for a cross - harbour transport of 6,000 tons diesel shipped in a 6.5kt barge.

This situation provides almost a lay-time of two days, including shifting/sailing to the other terminal. This amounts to earnings of 36,000 euros over two days, or 18,000 euros per day. Consequently, the hourly earnings would be 750 euros instead of 300 euro per hour as per TTB demurrage, if the barge is kept on demurrage it can ‘cost’ the owner 10.800 per day. As the barge is missing opportunities on other trips.

A similar scenario applies to the Rhine, where a 2,500-ton barge could earn 80,000 euros for a trip between the ARA region and Strasbourg.

This journey, including one day of lay-time time, takes a total of 6 days, which equates to 13,333 euros per day or 555.55 euros per hour. In comparison, the standard TTB rate is only 140 euros per hour. If a barge were held on demurrage for a week, the barge owner could face a potential loss of 69,812.40 euros (calculated as 555.55 euros per hour minus 140 euros per hour over 168 hours).

The above examples are taking into account a price per ton scenario, if the market was based on a lumpsum or day-price, these figures might have looked differently.

Example slow market

In a slow market, an 8,000-ton barge that only loads 5,000 tons might see its demurrage rate drop from 400 euros (TTB) per hour to 300 euros per hour.

However, when the market picks up and demand increases, the charterer may have no choice but to pay the full 400 euros per hour due to limited alternatives.

Reason for demurrage

Demurrage is a fee charged when barge remains at a refinery or terminal beyond the agreed free time specified in a barge contract. Barge companies depend on the efficient and timely movement of cargo. This fee is meant to encourage prompt loading and discharging, rather than having a barge wait indefinitely. It is a fee to cover costs and on top some extra’s to make up for the delays for the next voyage or missed opportunities.

Economy of scale

Due to rising costs, smaller barges with a capacity of 0-3,500 tons are struggling to break even or make earnings when on demurrage due to the outdated TTB rules, there is no room for negotiation. In contrast, larger barges find it easier to reduce their demurrage rates when in negotiations or even turn a profit while on demurrage.

It is unlikely that the demurrage rate for a 12,000 DWT barge would be nearly four times that of a 3,000 DWT barge, due to economies of scale. However, such a scenario could occur if there is a significant relation to market tightness.

When it comes to barge size and economies of scale, the key principle is that larger barges can spread fixed and operating costs over a greater number of tonnage, thereby reducing the cost per tons transported. Here's a breakdown of how this works:

Fixed Costs: These are costs that the shipping company has to pay regardless of the amount of cargo carried. They include:

1. Capital Costs: The cost of buying or leasing the ship.
2. Crew Costs: Salaries, food, and accommodation for the crew.
3. Insurance: Insurance premiums for the vessel.
4. Maintenance: Regular maintenance and repair costs.

Larger ships can spread these fixed costs over more tonnage. For example, if a 6,000 tons barge and a 12,000 tons barge both have similar fixed costs, the cost per ton will be halved for the larger ship.

Operating Costs: These are costs that vary with the operation of the ship, such as:

Fuel Costs: Larger ships generally consume more bunker fuel, but they also carry more cargo. If the fuel consumption does not double when the cargo capacity doubles, there will be economies of scale. Modern larger barges are often designed to be more fuel-efficient per ton than smaller ones.

Port Fees: These are usually charged per barge, not per tons of cargo. So, a larger ship can spread these costs over more tonnage. A little bit more is paid due to length.

Here's a simplified example (fictive numbers):

 
Small Ship (2,000 Tons) Large Ship (8,000 Tons) Fixed Costs $50,000 $80,000 Fuel Costs $30,000 $50,000 Port Fees $10,000 $15,000 Total Costs $90,000 $145,000 Cost per TEU $45 $18.13

In this example, while the total costs of the larger barges are higher, the cost per ton is significantly lower due to economies of scale. Therefore the demurrage rates for smaller barges are currently not in line with the larger ones.

Rhine barges

Another influential factor is crewing. For instance, a Rhine B crew operating a barge 24/7 with multiple Rhine patents can incur higher overhead costs compared to an ARA crew with fewer personnel. Although smaller barges (0-3000ton) may be more expensive to operate, their demurrage rates have historically lagged behind those of larger barges.

Negotiations

Companies often negotiate over price differences, such as 0.10 to 0.20 cents per ton, which translates to 500 to 1000 euros on a 5000-ton shipment. As this has a guaranteed impact on earnings. However, discussions around demurrage are usually neglected. Yet, negotiating demurrage fees of 50 euros per hour can save or deliver 1200 euros for just 24 hours on demurrage.

How to proceed?

It’s difficult to state what a barge should earn as a minimum being on demurrage, therefore it is best to let the market decide. There are two alternative options: adopting a model similar to deep sea shipping where rates are negotiated, or convening as an industry to review current rates and decide which, if any, need revision.

Demurrage prices being outdated in the current terms and conditions will encourage companies to take these into the price negotiations more often, which might be a good thing instead of being fixated on a 14 year old model.