What Is Time Charter Equivalent (TCE)?
Time charter equivalent (TCE) is a shipping industry measure used to calculate the average daily revenue performance of a vessel. Time charter equivalent is calculated by taking voyage revenues, subtracting voyage expense, including canal, bunker and port costs, and then dividing the total by the round-trip voyage duration in days. It gives shipping companies a tool to measure period-to-period changes.
- Time charter equivalent (TCE) is a method for determining the net profit or loss of operating a vessel per day.
- Voyage expenses are mainly fuel and the costs related to maintaining the crew onboard in terms of salary but also food and quarter.
- Looking at TCE provides shipping companies a way to track period-by-period changes.
Understanding Time Charter Equivalent
The time charter equivalent is calculated as:
(Voyage Revenues - Voyage Expenses)
Round Trip Duration in Days
It can also be calculated on a per-day basis based on period, spot and weighted average.
TCE revenue is used as a measure of performance to track performance from one period to another but it is a non-GAAP measure. Companies may still choose to report it in their financial statements as a footnote.
The TCE is used by cargo brokers in the shipping industry to present chartering opportunities to shipowners. Chartering opportunities differ widely in potential revenues and costs. The TCE is a way to describe these opportunities in a standardized way — essentially dollars per day — making comparisons easier for shipowners.
Why Per-Day Costs Matter
The single largest variable costs of a voyage are fuel and the cost related to crew upkeep, and this varies in direct relationship to the speed at which the voyage is performed. The speed of the laden part of the voyage is agreed with the charterer when the voyage charter is negotiated. The ship owner or, if there is one, the time charterer chooses the speed of the vessel for the ballast voyage (when the ship is empty of cargo) sailing the ship to a position where it can load a cargo for the voyage charter. In both cases the slower the ship, the lower the fuel cost as consumption will be lower and the faster the ship, then the higher the fuel consumption and therefore the cost.
The slower a ship sails, the longer the voyage (more days) but the less fuel it consumes. So the calculation of the TCE will be affected in two ways (as the Freight lump sum remains the same). The net freight will go up because of the savings made on the fuel but at the same time, it will be divided by more days taking the TCE down. Therefore a ship should only go slower if the cost of fuel, saved by slower sailing, offsets the reduction of the TCE caused by the increase in the number of days the voyage lasted. Finally, if the fuel cost saving justifies slower sailing then the owner will look to the lost opportunity of the days that could have been spent on the next voyage compared with the improvement in TCE from slower steaming on the current voyage. This is a very important point but the decision must be taken at the start of a voyage.