Concordia Maritime’s business and revenue model consists of supply vessels to customers in need of transporting oil and petroleum products. The majority of its revenues are currently in the form of a freight rate agreed on in advance supplemented by revenue generated from profitsharing clauses.
Revenue
For shipping companies, like Concordia Maritime, that charter out vessels for long periods, revenues consist of a freight rate agreed on in advance that stretches over the entire charter period. The freight rate depends on the length of the charter and the state of the market when the contract is signed.
At the end of 2008, all Concordia Maritime’s vessels so far delivered were signed to charters of between five and ten years (from the delivery date). For some of the vessels, the charters include a profit-sharing clause in addition to the freight rate. Somewhat simplified, this means that Concordia Maritime and the customer share the revenues that exceed a pre-specified level.
Another important revenue source is the sale of ships. Here, prices vary depending on the market and the condition of the vessels. Timing is thus crucial for a profitable sale.
Costs
The largest costs are normally daily running costs, voyage costs and capital costs.
The vessels’ daily running costs include costs for crews, periodic (dry-dockings) and day-to-day maintenance, repairs and insurance. For vessels signed to long-term charters, there are sometimes clauses that regulate the freight rate if daily running costs increase.
Voyage costs mainly consist of fuel consumption and port dues. For vessels in the charter market, like Concordia Maritime’s vessels, the contracting party pays all the voyage costs.
Capital costs, depreciation and financial costs can vary considerable depending on the company’s capital structure and debt equity ratio. Here, too, timing is crucial when it comes to purchasing vessels. Ship prices have a large impact on a vessel’s capital costs and thus the shipping company’s profitability over a long period of time.
Charter or spot market?
The two dominating charter types in tanker shipping are spot and time charters. In the spot market, the price can fluctuate from day to day. In the crude oil segment, freight prices can vary relatively heavily in a single day, and comparatively large variations in the price, “freight rate”, can occur during a relatively short period. The market is influenced solely by supply and demand, which means that if there is a shortage of available vessels and a large demand for transportation, freight rates rise and vice versa.
On the time charter market (also called the “period market” or the “time-charter market”), vessels are instead contracted for longer periods, normally between one and three years, at a price determined in advance. There are longer contracts, but they are rare.
Normally, freight rates in the spot market reflect the shipping companies’ and the customers’ assessments of the economic climate in the short term. The time-charter market, on the other hand, reflects the economic trend anticipated by the parties in a somewhat longer perspective.
Most shipping companies use a combination of employment on the spot market and charters for their fleet. The majority of the world’s large tankers are, however, employed on the open spot market. Generally speaking, it can be said that shipping companies are reluctant to tie up tonnage for long periods when prices are high on the spot market.
In addition to spot and time charters, there are also so-called COAs (Contract of Affreightment), which means that the contract is valid for a specific length of time and the shipping company assumes responsibility for a specific part of the customer’s logistics solution. In other words, instead of offering a specific vessel, the shipping company offers a service, that is, to transport a certain quantity at a price determined in advance.