Why should you understand spot exposure and contract coverage?

Spot charter contracts and time charter contracts

There are two main types of contracts in the dry bulk shipping industry, spot charter contracts and time charter contracts.

A spot charter is generally a contract to carry specific cargo from a load port to a discharge port at a per-day rate or a per-ton carry amount, depending on the agreement. Usually, the shipping rate is the current market rate. Under spot charter contract, shippers pay voyage expenses such as port, canal, and fuel costs. In contrast, a time charter is generally a contract to charter a vessel for a fixed period at a set daily rate. Under time charters, the charterer bears voyage expenses.

Under both spot charter contracts and time charter contracts, shippers are responsible for paying vessel operating expenses.

The spot exposure of Diana Shipping

Spot exposure measures the extent to which the vessels are exposed to the spot market contract. A large spot exposure can generate much higher profit when shipping rates are rising but a greater loss when vessel hiring rates are low.

Diana Shipping charters its dry bulk vessels to customers primarily pursuant to time charters. At the end of 2012, Diana Shipping had fixed 31 of them on long-term time charters ranging in duration from 17 months to 62 months. Diana Shipping intentionally puts some of its vessels on short-term time charters in order to ensure flexibility in responding to market developments.

How will time charter contracts benefit Diana Shipping?

Time charter contracts are indeed a type of hedging activity. Since shipping rates are fixed for a certain period, Diana Shipping will have a more stable and predictable cash flow under time charter contracts. Also, time charter contracts allow Diana Shipping to organize its shipping schedule in advance in order to achieve a high fleet utilization, which is calculated by voyage days over calendar days.

Time charter coverage is often illustrated by contract coverage, which is defined as “the percentage indicating the part of shipping days that are contracted for a specific period.” According to Deutsche Bank equity analyst Justin Yagerman, Diana Shipping now has contract coverage of at least 62% in 2014, but the company may adjust the charter hire periods of the vessels in its fleet according to developments in the dry bulk industry.

However, Diana Shipping may underperform in times of improving rates due to its high exposure to long-term contracts, because the contracts set the shipping rates below current market rates. So Diana Shipping won’t be able to take advantage of rising rates.

Time charter equivalent rates

In Diana Shipping’s annual report, time charter equivalent rates are defined as “time charter revenues less voyage expenses during a period divided by the number of available days during the period,” while some companies use voyage days instead. Although this rate is regarded as a standard shipping industry performance measure used primarily to compare daily earnings generated by vessels on time charters with earnings generated by vessels on spot charters, this rate doesn’t necessarily let investors compare different companies. The reason for this is that different companies have different fleet compositions, and time charter equivalent rates are usually not broken down by fleet sizes.