Worldscale (in Shipping) - Hellas Highlights

With the announcement in 2014 that Worldscale Association would review the fixed rate differentials 1 and 2 relating to the ECA fuel requirements, Claims Executive Efcharis Rocanas takes a look at the history of Worldscale and the impact of the changes.

I) Worldscale - What is it?

Worldscale, or "Worldwide Tanker Nominal Freight Scale", is a point of reference intended to assist the parties trading oil tankers' cargo to conduct their business. Rates for voyages are calculated in accordance with a standard calculation and revised in accordance with an established procedure. When using world scale rates, there are fixed and variable differentials which must be taken into consideration. Worldscale is produced by Worldscale Association(NYC) Inc. for the Americas and by Worldscale Association (London) Ltd. for the rest of the world,hereafter "the Associations". The freight for a given ship and voyage is expressed as a percentage of the published rate and is intended to reflect the freightmarket demand at the time of fixing.The rate calculations are made in USD and are per tonne for a full cargo, for the standard vessel, based on around voyage from loading port(s) to discharging port(s) returning to the first loading ports using standard factors:

• Standard Vessel
• Port Time
• Fixed Hire Element
• Bunker Prices
• Port Costs
• Canal Transit Time

Worldscale is recalculated once every twelve months and revised rates are effective from 1st January of every year.They reflect changes in bunker prices, port costs, and market demands for types of vessels and types of cargo etc.The variables used will be those collated by the Associations in the light of up to date information available to them up to the end of September prior to the effective date. Worldscale, or "Worldwide Tanker Nominal Freight Scale", is a point of reference intended to assist the parties trading oil tankers' cargo to conduct their business.

The scale comes from the merger which occurred in1969 of a detailed table, created by the London Tanker Brokers' Panel, (established in November 1952, there quest of BP and Shell, as an average total cost of shipping oil from one port to another by ship) with the American Tanker Rate Schedule. By 2002, the table included the average cost of 320,000 voyages and alternatives from one load and one discharge port,to five loads and ten discharge ports.

The Associations are controlled by a management committee of senior brokers, from leading tanker broking firms, in London and New York respectively. Worldscale is available by subscription on an annual basis. The fee entitles the subscriber to the schedule, to notices of all amendments and gives him the right to request rates for any voyage not shown in the Schedule. In negotiating the rate of freight, the table is referred to as WS100 or 100% of Worldscale. The actual price negotiated between the shipowner and the charterer can range from 1% to 1000% and is referred to respectively as WS1 to WS1000, depending on how much profit (orat times loss) the former is willing to take on that voyage,and how much the latter is willing to pay

II) Some History - The Origin of Worldscale and its Evolution A) The Origin of Worldscale - WWII

This system originates from the Second World War. Before the war, freight rates for tanker voyage charters were expressed in dollars or shillings and pence per longton. This meant that when a charterer required multiple loading or discharging options, it was necessary to negotiate many freight rates. During the war, the British and then the US governments requisitioned shipping,and Owners received compensation on the basis of a daily hire rate.

On some occasions, however, the major oil companies were able to charter requisitioned tankers on a voyage basis from the government, for their private use. On such occasions, the oil companies paid freight to the government concerned. The rate of freight, whichwas dependent upon the voyage performed, wasdetermined in accordance with a scale or schedule ofrates laid down by that government. These rates were calculated in order to ensure that, after allowing for port costs, bunker costs and canal expenses, the net daily revenue was the same for all voyages. This marked the birth of the principle for tanker rate schedules, which establishes that the Owners should receive the same net daily revenue irrespective of the voyage performed.

B) The Evolution of Worldscale post WWII

Government control of shipping continued until 1948. By this time the tanker trade had come to recognise the advantages of freight rate schedules in the free market, and so further evolved this system of negotiating by way of "MOT" (the British Ministry of Transport gave rates effective 1st January 1946 and this schedule became known simply as "MOT"). An American equivalent also evolved named "USMC (last rates to be issued by the United States Maritime Commission, which took effect from 1st February 1946.) These rates were plus or minus a percentage as dictated by the supply and demand position in the market.

Between 1952 and 1962 a number of different schedules were issued as a service to the tanker trade by non-governmental bodies; (Scales Nos. 1, 2 and 3 and then Intascale in London, ATRS in New York). In 1969 the joint London / New York production of the scale was launched (to replace both Intascale and ATRS), and was named the "Worldwide Tanker Nominal Freight Scale", more colloquially referred to as simply "Worldscale".

The word "nominal" emphasises that, during the period of government control, the schedule rates were intended to be used as actual rates. Later, freely negotiated percentage adjustments to the scale rates determined the actual rate used for the payment of freight. It became the custom to express market levels of freight in termsof a direct percentage of the scale rates (instead of a plus or minus percentage.) This method is known as "Points of Scale".

Worldscale 100 means 100 points of 100 per cent of the published rate or, in other words, the published rate itself, sometimes referred to as "Worldscale flat", while Worldscale 250 means 250 points, or 250 per cent of the published rate. Similarly Worldscale 30 means 30 points, or 30 per cent of the published rate

C) Old Worldscale and New Worldscale

"New Worldscale" was introduced with effect from 1st January 1989. The "new" was dropped and now it is generally understood that "Worldscale" refers to the new scale, while the previous scale is called "Old Worldscale". It was only when a replacement for Old Worldscale was being considered that a systematic attempt was made to establish the size of standard vessels, and the relevant daily hire element that would provide the best practicable basis for a scale. It was concluded, from the results of these exercises, that a standard vessel with a carrying capacity of 75,000 tonnes (Panamax size) and a daily hire element of $12,000 was likely to provide such a basis for a scale to be used during the 1990s.

III) Worldscale and ECA Fixed Rates -An illustration of reviews

Emission control areas (ECAs) are areas in the sea where stricter controls have been established to minimise airborne emissions from ships, as defined by the Protocol of 1997 (MARPOL Annex VI), which included the new Annex VI of MARPOL 73/78, entering into force on19 May 2005. These regulations stemmed from concerns about the contribution of the shipping industry to air pollution, and the potential of impact on the environment. The Annex has since been revised and enforced with significantly tightened emissions limits. This has led to the production of high and low sulphur fuel oils, diesel oils and gas oils.

Current ECA's are defined as follows;

• the BALTIC SEA,
• the NORTH AMERICAN ECA (including most of the US)
• the CANADIAN COAST and
• the US CARIBBEAN ECA

Further areas may be added via the protocol defined in Annex VI.

A) The Incorporation of ECAs into Worldscale

ECAs, are incorporated into Worldscale by fixed differential based upon miles steamed within the ECA. The fixed rate differential, set out by Worldscale, is for both ballast and laden legs of voyages in the zone. The element which is up for review is the difference between what shipowners have to pay for marine gas oil, which is an amount reported to be significantly smaller than the compensation they received from charterers in line with the Worldscale differential. The Associations calculate their bunker prices for the following year at the end of each year, however, there is no interim review, even if there is a large deviation in bunker prices, as is the case today.

B) The 2015 Review of the ECA Fixed Rate Differentials, Following Falling Bunker Prices

In October 2014, it was announced that the Worldscale Association would review the fixed rate differentials 1 and 2 relating to the ECA fuel requirements for 2015 for the Baltic and North Sea ECA and North America and Caribbean ECA areas, which came into force on the 1st January this year.

The Association had announced a new fixed differential of $48.35 per nautical mile for vessels sailing in the Northwest European ECA zone. This represents the extra cost of burning 0.1% gas oil within the zone compared with the 380 CST fuel oil grade delivered basis Rotterdam used to calculate Worldscale flat rates.The differential for the North America and Caribbean zone was $65.31 per mile.

In March 2015 a Worldscale circular stated:

"Due to the recent fall in fuel prices, it is expected that the differential values for both the North American and Caribbean ECA and the Baltic and North Sea ECA will fall. The differentials will be revised by circular, anticipated to be published on the 10th April and will be effective from that date. It should be noted that a review of ECA differentials will take place quarterly for 2015 and where significant revision is required a circular will be issued"(http://www.platts.com/)

As a principle, interim revisions are confined to those thought necessary in the judgement of the Associations. The reported disproportionality between what shipowners pay for operating in the fixed rate differential set out by Worldscale for ballast and laden voyages in ECA zones and the compensation they received from chatterers in line with the Worldscale differential was reviewed in April. As per Circulars 15 and 16 with Effective Date (for both) 10 April 2015 the fixed rate differential values for the Baltic Sea and North Sea ECA fell to USD 33.00 per mile and the North American ECA fell to USD 50.03 per mile.

The above amendments are effective for all voyages on which loading iscommenced on or after 10th April 2015. *