Demurrage

Demurrage Meaning

Demurrage refers to a penalty paid by the importer for failure during loading and unloading. While in financial terms, it is the cost paid for owning and holding currencies or commodities. It serves the purpose of covering the loss while the ship or asset was unduly occupied. 

Cargo owners charge this cost as a means of maintaining profitability. In this way, vessel owners can generate revenue. In the same way, it acts as a holding or carrying cost for the asset owners. Holding charge encourages owners to hold the assets to appreciate future value. However, it adds an extra cost to the consignee affecting the surplus profits. 

• Demurrage is a charge shippers (importers, exporters) must pay if they fail to load or unload items in or from the ship. 
• While in the case of commodity and currency trading, demurrage is a charge owners have to pay for holding that asset (money, gold, silver).
• If shippers exceed the free time, the vessel owner charges this fee to the shippers on a per-day basis. This charge differs from port to port and country to country.

Demurrage Explained

Demurrage has two meanings. It acts as a penalty for holding assets and goods. In the case of cargo, it is the penalty traders pay when they fail to unload goods within the laytime period. It is the inverse of dispatch. For currencies and commodities, it is the cost of holding that asset for a specific time. 

The term 'demurrage' derives from an old French word, 'demeurer,' which means lingering, staying, or remaining. German economist Silvio Gesell advocated this idea in the early 20th century. Gesell stated that idle money attracts no extra wealth. Thus, people should add a holding cost while lending currency to other people.

As money inflates over time, it will result in passive income for the lender. The Federal Maritime proposed the demurrage fees for the importers and exporters in 1984, revised in 2014. Various charter agreements, governed by charter parties, devise rules, and demurrage means a failure to abide by them.

In finance, demurrage has many uses and applications. Let us look at the uses in different areas:

#1 - Shipping

Vessel owners charge shippers holding costs for using land and equipment (ship). This demurrage container attracts a charge when the shipper exceeds the allocated free time. However, the owner can only claim a penalty if the ship or vessel is full. 

#2 - Currency Trading

For currencies, it is the cost of holding the currency for a stipulated time. Higher demurrage costs lead to the rising velocity of money, making it less appealing to investors. It discourages the investors from holding the money instead investing in yielding assets. However, certain economists argue that denying demurrage costs can help them inflate their net worth. 

#3 - Commodities Trading

Commodity trading is the cost of holding commodity assets like gold and silver. This charge can be in the form of insurance and storage charges (locker). Investors might hesitate to hold the commodities if there are high demurrage fees. Also, borrowers can borrow money against precious metals. 

Demurrage Charges 

The holding charge differs for every shipper, currency holder, and commodity owner. In the case of shipping, the Federal Maritime allows vessel owners to charge holding charges on the shipper if they exceed the laytime period. The carrier owner will inform the shipper about the vessel's arrival for easy cargo pickup. 

Normally, the free time allocated to shippers is 3-4 days. If it exceeds the laytime period, a penalty arises. For example, if the shipper exceeds free time for 1 to 4 days, the penalty would be $245. Likewise, for 4-5 days, the shipper has to pay $290 to the cargo owner. From the discharge date of the container to the gate-in empty date, the owner calculates the vessel's operating costs. Cargo owners calculate the charge on a per-day basis. The daily holding charges range from $75 to $150 per container. 

For currencies, the bank levies holding charges in account charges. The average holding charges range from $7 to $10 per month. According to a report by Xchange, the holding charge increased by 104% compared to 2020. The average holding cost among the major ports was $1219 in 2021. While in the case of commodities, the holder must pay the penalty in the form of storage costs. The average penalty charges are 1.25-2.25%. 

Examples

Let us look at some demurrage examples to comprehend the concept better.

Example #1

Suppose Alexa is the owner of textile mills. She imports linen cloth from Marco, who lives in Italy, for his production. On July 15, 2022, Marco exported the order to Houston. And on August 20, the ship arrived at Houston port. The vessel owner informed Alexa about the arrival, but there was no response. Finally, after three-four days, he contacted the owner regarding unloading her items.

Since she arrived after the allocated free time, she was liable for a penalty. Similarly, the vessel owner would have also charged the demurrage container if Marco had taken the time to load items. 

Example #2

In 2022, the Federal Maritime Commission (FMC) announced the hike in demurrage and detention (D&D) charges. The top highest charging ports worldwide are in the United States, including New York port, Long beach port, and other such ports. The average holding cost at these ports is $2,210 to $3,182.  

Frequently Asked Questions (FAQs)

Recommended Articles

This article is a guide to Demurrage & its meaning. Here, we explain its applications in shipping, currency and commodity trading, charges, and examples. You can also go through our recommended articles on corporate finance –

• Bill of Lading
• Maritime Law
• Procurement