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COVID-19: Standoffs emerge in dry bulk freight fixture talks over infectious disease clause

New York — The global dry bulk freight market, already paralyzed by the coronavirus or COVID-19, is now finding the conclusion of fixtures being hampered by the inclusion of a controversial infectious disease clause in charter party agreements, industry sources said Tuesday.

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Many market sources say the clause is weighted heavily in favor of owners and was leading to standoffs over the fixing of ships for hauling dry bulk commodities.

BIMCO, the world's largest international shipping association with more than 2,200 members, published the clause for time and voyage charter parties to deal with infectious or contagious diseases. It provides owners with express rights to refuse orders to a port or place where there is a risk of exposure, covers deviation and clarifies the charterers' indemnity, and confirms when a vessel remains on hire or on lay time.

The clause was first published in 2015 during the Ebola virus outbreak in West Africa.

"As head owners, we are trying to include the BIMCO Infectious or Contagious Diseases Clause in the charter parties for all the ships we control, both dry bulkers and tankers," a source with a Europe-based shipowner said this week.

The bone of contention for charterers is that any additional costs or liabilities arising out of a ship visiting or having visited an affected area, which would include screening, cleaning, fumigating and quarantining the vessel and its crew, would be on their account. It also necessitates the ship remain on hire throughout.

"The BIMCO clause is too heavily in the owner's favor and no charterer would accept it," a Panamax ship-operator source said, adding a middle ground was needed to get business done.

According to a Supramax ship-operator, charterers are currently negotiating for a ship's head owner to absorb any delays at load and discharge ports resulting from crew infections or a vessel having called recently at a Chinese port, even though this was contrary to what the BIMCO clause implies.

Over the past few weeks, some fixtures failed to conclude as parties could not agree on the infectious disease clause, market participants said.

"To avoid any failed fixtures, both parties should bring up the clause beforehand. If they can agree, that would be great. If they can't, the negotiation will fall through," a Singapore-based Panamax shipbroker said.

Attempts have been made by some charterers to persuade shipowners against using the clause, or watering it down. "There have been cases of charterers taking ships on subjects first, seemingly showing the intention that they are keen on doing business; hoping to convince shipowners not to include the clause but failing at the very end," another Supramax ship-operator source said.

However, a chartering source with a Chinese steel mill said none of his company's shipping fixtures had failed and said its cargo operations were normal.

AVOIDING CHINA

Many countries have set up quarantine period for ships coming from China since early February to contain the spread of COVID-19. On February 14, Australia extended its entry restrictions until February 22 with the quarantine period remaining at 14 days. See earlier story

As a result, owners are asking for a premium for trips to China, as well as trying to avoid such trips, even though the freight market is weak.

The market situation has prompted many participants to opt for period fixtures given the weak sentiment and uncertainty caused by the virus outbreak.

"The period interest from mining majors is quiet strong and the spot market is terrible. We prefer to fix our ship on period contract basis at an acceptable fixed rate to pass the hard times and avoid the uncertainties caused by the coronavirus," said a source with a Capesize shipowner, who has fixed several ships on period basis recently.

Market sources indicated the one year charter rate was in the range of $11,000s-$14,000s/d.

Meanwhile, time charter equivalent or TCE rates for all ship types have been very low since the start of February.

The Platts dual Cape T4 indices for scrubber-fitted ships and non-scrubber fitted ships dropped over 60% and 70% respectively after the New Lunar Year holiday. The fall in crude oil prices and weak bunker demand has seen the Platts Scrubber Premium Index for Capesize ships fall 17% over the same period.

Comparison of Cape T4 index

Feb 14,2020
Jan 28,2020
Change

Cape T4 INDEX

(Scrubber-fitted)
5,020
12,858
-60.96%

Cape T4 INDEX

(Non-scrubber fitted)
2,713
9,234
-70.62%

Capesize

Scrubber Premium Index

6,644
8,036
-17.32%