Weathering the Storm: Managing Commercial Risks in the Chartering Business

My name is Davide Ramponi, I’m 20 years old and currently training as a shipping agent in Hamburg. On my blog, I take you with me on my journey into the fascinating world of shipping. I share my insights, experiences, and progress as I work toward becoming an expert in the field of Sale and Purchase – the trade with ships.

Chartering can be a highly profitable venture—but it’s also a business filled with uncertainties. Freight markets are notoriously cyclical, bunker prices fluctuate daily, and the wrong counterparty can turn a promising deal into a financial headache. In short, the commercial risks in the chartering business are real—and growing.

In this post, I want to break down the key commercial risks faced by charterers and owners alike, and most importantly, offer concrete strategies for managing and mitigating these risks. From market volatility to bad debt losses, we’ll look at real-world challenges and the proactive measures that can make the difference between smooth sailing and serious trouble.

The Nature of Commercial Risk in Shipping

Shipping has always been a volatile business. It’s exposed to geopolitical shocks, commodity demand cycles, seasonal fluctuations, and regulatory change. This volatility creates both opportunities and risks—but without a risk strategy, even the best market conditions can turn against you.

Let’s look at the main commercial risk categories and how they impact the chartering landscape.

1. Market Volatility: The Double-Edged Sword

Freight rates are the heartbeat of the chartering business—and they’re anything but stable.

📉 When the Market Turns

Whether you’re a shipowner fixing your vessel on a time charter or a charterer locking in space for cargo movement, market timing is critical. But predicting rate movements is difficult. Rates can spike due to port congestion, weather, or sudden surges in demand—and crash just as fast.

🔻 Example:

In early 2020, a dry bulk charterer fixed a Capesize vessel for a six-month period at what seemed like a competitive rate. Just weeks later, COVID-19 triggered a collapse in global trade. Spot rates fell below operating costs—and the charterer was locked into a loss-making contract.

🧠 Risk Management Tips:

• Use index-linked contracts to create flexibility based on market movements.

• Hedge freight exposure using Forward Freight Agreements (FFAs).

• Diversify charter durations—combine short-term and long-term deals to balance risk.

2. Rising Operating Costs: The Fuel Factor

One of the biggest variables in shipping operations is bunker fuel cost—and it’s not under anyone’s control.

⛽ Bunkers and Budget Blowouts

Fuel prices can fluctuate dramatically due to crude oil markets, geopolitical instability, and environmental regulations (e.g. IMO 2020). A time charterer is typically responsible for providing bunkers—and cost overruns can destroy profit margins.

📌 Case from the field:

A container ship was fixed for 12 months in early 2022 when Very Low Sulphur Fuel Oil (VLSFO) was around $550/mt. Six months later, prices surged to over $900/mt due to refinery disruptions and sanctions. The charterer, who hadn’t factored in this cost risk, had to renegotiate the charter rate—or walk away.

💡 Cost Control Strategies:

• Include bunker adjustment factors (BAF) in your contracts.

• Use price hedging instruments if trading high volumes.

• Monitor fuel efficiency and consider vessels with eco-engines or scrubbers.

3. Credit Risk and Bad Debt: When Charterers Don’t Pay

No matter how attractive a fixture may seem on paper, it’s only as good as the counterparty’s ability—and willingness—to pay.

💸 The Reality of Bad Debt

Bad debt occurs when a charterer defaults on hire payments or post-voyage obligations. This can lead to cash flow shortages, legal disputes, and operational disruptions.

📌 Real-world scenario:

An owner fixed a multi-voyage deal with a small trading company offering above-market rates. After two completed voyages, payments slowed and eventually stopped. By the time legal proceedings began, the company had filed for insolvency. The owner lost over $500,000—and spent months tied up in court.

🔒 Credit Risk Management:

• Conduct background checks before agreeing to charter terms.

• Request financial guarantees or bank letters of credit for new counterparties.

• Use*freight prepayment clauses for high-risk or first-time clients.

• Don’t underestimate broker due diligence—reputable intermediaries often have the best market intel.

4. Commercial Disputes: When Things Go Wrong

Disputes over freight rates, demurrage, speed claims, or off-hire periods can eat up time and resources—and damage business relationships.

⚖️ Example:

A voyage charterer disputed demurrage charges, arguing that port congestion was beyond their control. The charter party didn’t clearly allocate risk in such cases, and the dispute escalated to arbitration—lasting six months and costing both parties legal fees.

📜 How to Avoid It:

• Draft precise clauses that clearly allocate commercial risk (e.g. for port delays, weather disruptions, cargo readiness).

• Define calculation methods and notice requirements for demurrage and laytime.

• Include fast-track dispute resolution mechanisms, like mediation before arbitration.

5. Contract Design: Your First Line of Defense

Good contract drafting is not just a legal formality—it’s a business tool to protect against uncertainty.

🧾 Common Pitfalls:

• Vague payment terms (e.g. “prompt payment” instead of “within 3 banking days”).

• Ambiguous clauses that allow multiple interpretations.

• Missing provisions for common events like fuel price surges, piracy, or strike delays.

🧠 Smart Contract Design Tips:

• Use standard industry forms like GENCON, NYPE, or BIMCO clauses—but tailor them to your trade.

• Clearly define performance parameters (e.g. speed, fuel consumption) and how they’ll be measured.

• Add force majeure clauses that include events like pandemics, war, or cyberattacks.

• Build in flexibility with optional extensions, early termination rights, or minimum guaranteed earnings.

Putting It Into Practice: A Case Study

Let’s look at how one shipping company successfully navigated commercial risks through smart planning.

📌 Scenario:

A dry bulk operator faced declining freight rates and high bunker volatility in late 2022. Instead of fixing all ships on spot, they used a mix of:

• 3–6 month time charters linked to the Baltic Dry Index (BDI)

• Bunker hedging contracts through a bank partner

• Credit vetting for all new clients

• Tight contract language specifying off-hire and laytime terms

When spot rates fell below breakeven, their indexed time charters helped them stay afloat. When bunker prices spiked, their hedging contracts protected margins. And when one counterparty delayed payment, legal action was swift—because the contract had tight, enforceable terms.

🧭 Lesson: Risk can’t be avoided—but it can be managed.

Conclusion: Don’t Just Accept Risk—Plan for It

The chartering business thrives on opportunity—but opportunity always comes with risk. The trick isn’t to avoid risk altogether, but to understand it, prepare for it, and manage it smartly.

⚠️ Market volatility, bunker costs, credit risk, and vague contracts are common threats.

🔧 But with hedging tools, credit checks, and tight contracts, these risks become manageable.

📈 Owners and charterers who think strategically—and draft carefully—stay ahead of the curve.

Have you faced commercial risks in your chartering deals? What strategies do you use to protect your business?

Share your experiences in the comments—I look forward to hearing your thoughts!

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