What Is Demurrage?
In finance, the term “demurrage” has two main meanings. Its first meaning is in relation to currencies and commodities, where it refers to the costs of holding those assets. In this sense, it is analogous to the term carrying costs.
An alternate meaning relates to the shipment of goods by sea. In this context, demurrage refers to the penalty paid by a charter company for failing to load or unload a vessel within the timeframe set out in its contract.
- Demurrage is a word with two meanings that are different depending on whether demurrage refers to the commercial shipping business or finance.
- The first relates to the carrying costs of currencies and commodities, while the second refers to a penalty paid by companies who charter cargo ships.
- Charter companies are usually given three days to load or unload their ships before being required to pay demurrage.
- The companies responsible for paying demurrage can avoid the charges by having a backup courier just in case.
- A major cause of demurrage charges that occur in the shipping business is when containers are held in customs.
In the context of currencies and commodities, demurrage refers to the various costs of owning the currency or commodity in question. For example, currency holders may need to pay account fees, whereas holders of commodities such as gold and silver may need to pay insurance and storage fees as well.
Economically speaking, higher demurrage costs will likely increase the velocity of money by making it less attractive for investors to store their wealth in these types of instruments. Conversely, high demurrage should incentivize investors to place their wealth in yield-generating assets such as dividend-paying stocks or fixed-income instruments.
Depending on your perspective, high demurrage may be positive or negative for economic performance. For instance, some would argue that demurrage costs are helpful because they encourage investors to deploy their savings into the real economy rather than "hoarding" them in inert assets. But others argue that, by storing wealth in assets such as cash and gold, investors help the economy by contributing to its base of quality collateral. After all, cash stored in bank accounts can be used as the bank’s collateral base, allowing them to extend more loans and thereby supporting the economy. Similarly, holders of precious metals can borrow against those assets or sell them at a later time to fund their investments.
The other main meaning of demurrage is in relation to international maritime shipping. When a chartered ship fails to load or unload its cargo in the timeframe set out in its contract, it may owe the owner of the vessel a penalty fee known as demurrage. In this sense, the term traces its origins to the French word “demeurer”, which essentially means “to be late”. The typical timeframe to load or unload a chartered ship is three days. This timeframe is colloquially referred to as the ship’s “laytime”.
Example of Demurrage
Markus is an investor who is actively involved in the international oil trade. He owns a fleet of cargo vessels and uses them to ship oil between oil production centers and refineries located in key hubs such as the United States, West Africa, and Europe. Rather than operating his vessels himself, Markus relies on a third-party charter company that operates his vessels on his behalf.
As part of his business operations, Markus purchases large quantities of oil and then stores them in large vats before they are ready to be loaded onto his ships. To be profitable, Markus must ensure that his ships are loaded and unloaded quickly so that he minimizes the time and cost of storing the oil. After all, storing the oil on land involves demurrage costs for transportation, labor, and insurance. Similarly, every hour’s delay in loading or unloading his ships costs him lost revenue due to production and shipping delays.
Thankfully, when the third-party charter company that operates his vessels takes more than three days to load or unload his vessels, they are required to pay him a demurrage fee. This helps to defray the cost of his lost revenues and additional expenses.
What Are Demurrage Rates?
A single governing body does not charge the rates, therefore the price per day of demurrage rates varies. A review of multiple sources shows the lower end of demurrage charges being around $100 per container per day. On the upper spectrum, it can be $300 per container per day or even more if there are additional considerations such as how busy the port or railyard is and that organization's approach to conditional charges.
Why Is Demurrage Charged?
Demurrage is charged when a company delivering containers does not unload or move them expeditiously. Demurrage can be considered a penalty for slowing down the ebb and flow of that port or railyard's business operations. It is a strong deterrent and keeps those responsible for their containers moving at a reasonable, agreed-upon pace.
Who Has to Pay Demurrage?
Demurrage charges are enacted by the authority owning the land or space where the containers are being stored. The owner of the containers, who is usually the shipper, is the one who is responsible for demurrage charges.
The Bottom Line
Demurrage has two meanings and is more commonly used to discuss the penalty charges accrued when not moving shipping containers during the allotted time frame. In finance, demurrage occurs when there are costs associated with owning or holding currency.