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Seven kinds of counterparty: part one

Seven kinds of counterparty: part one

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I caught sight of Tim Huxley on Splash TV, expressing his dissatisfaction with the counterparty risk in dry cargo, and this led me to think a little about the nature of counterparty risk in shipping. I have stolen the title from a book that Tim will certainly remember, and have listed seven kinds of counterparty to the shipowner in chartering transactions:

We’ll start with the Good, in this article, before moving on to the Bad and the Ugly:

1. The government

This is a true story. A very well known shipowning company in the tanker business had four VLCCs on charter to a Latin American state owned oil company when the second oil price hike destroyed the tanker market for a generation. The four ships had been fixed at very ritzy rates, and each day the owners would come to the office expecting to find, either a notice seeking to terminate the charters on a technicality, or at the very least a demand for a re-negotiation. Nothing happened. The charters ran, and ran, and ran, and the company stayed afloat. It is with us, and flourishing, today. Years after the event, the owners learned that their counterpart had indeed wanted to tear up the charters, but had been told that to do so would have been interpreted by the bankers of the planet as a sovereign default, and their parent government’s treasury had ordered them to grin and bear it!

2. The oil major, and other really big outfits

Nice work if you can get it, but, whilst you will get paid on time, you will have to accept that oil companies and other huge multinationals stay immensely rich by not paying any more than they have to, and the days when they entered into “Hell or High Water” commitments are long gone. These days, they know as much about shipping as you do. Worse, they tend to think that the mere fact that they do business with you makes you attractive to others, so perhaps you really ought to be paying them. Expect to be run ragged by ‘expediters’ and by ‘inspectors’, who are paid to find things to niggle over, and who will, unfailingly, suceed in finding them. The Really Big Owner is the same as the oil major, but with bonus arrogance and nickel and diming.

3. The end user

The end user of the cargo is every shipowner’s dream of a charterer – they have lots of money, and if for some reason they don’t, you’ve got their stuff and you know their address, they won’t do a midnight flit and they don’t know about shipping – they are just happy to see their cargo turn up.

The Norwegians worked this one out, and called it ‘industrial shipping’, long ago. Sadly, honest to goodness end users who are willing to do deals with owners are now scarce, and you are most likely to find one willing to sign a big bucks, long term, contract if the requirement is non-standard and low profile; for instance if it involves cabotage in a place that people don’t want to go to, if the type of ship required is non-standard and has to be built for the job, and if the requirement has not been picked up by ingenious brokers and operators. Much money, time and effort is spent in seeking out End Users by a certain class of owner, and if you are lucky enough to find one you can do very well. I managed it once in my career – a comprehensive mugging to the extent of several ten year, full pay out, Baltime charters – that was over 20 years ago, and the ships are running yet …

The end user is most likely to be ‘mugged’ successfully if the ship required is modest, and the whole thing can be kept low profile. Every couple of weeks I see a German coaster, owned by her Master, always on the same run, always the same cargo. She is kept like a new pin, and when I looked her up I was amazed to find how old she is. Yes, there are potted plants in the wheelhouse. He ‘mugged’ his end user nicely, long ago, and good luck to him.

Next: The Bad…

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Andrew Craig-Bennett

Andrew Craig-Bennett works for a well known Asian shipowner. Previous employers include Wallem, China Navigation, Charles Taylor Consulting and Swire Pacific Offshore. Andrew was also a columnist for Lloyd's List for a decade.

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