Signal’s Position Value concept: Freight Pricing & Fairness Principles

Position Value - the concept

If you had to select between an Aframax opening in the US Gulf and a sister vessel opening in the Far East, it seems obvious to opt for the one opening in the West, based on knowledge of basic oil flows and historical market conditions, right? But how can someone quantify the premium of one geographical position over others? How can we determine the potential earnings of a vessel starting from different locations around the world?

Owners traditionally make an assessment based on their experience and by calculating round trip earnings on voyage charters to assess the value of each geographical area. However, this assessment becomes more difficult as trading complexity increases, triangulation increases and comparison of multiple options becomes a necessity. Wouldn't it be much simpler if we had a price tag for each area? And even better, if this price tag incorporated all trading options out of this area, the latest market levels but also the historical market to account for volatility?

This is exactly what the Position Value concept, developed by Signal Maritime Services, aims to achieve. At any given moment, each vessel's opening position holds an earning potential that reflects the condition of all relevant markets. The model analyses the historical voyages of a given vessel class to understand the market structure, including flows and their frequency. It then utilises data for port and canal expenses, current market rates, average fuel consumption and bunker prices to calculate the Time Charter Equivalent (TCE) for each potential voyage.

Next, the model identifies the most profitable sequence of voyages for any location worldwide, given the current market conditions and most common flows. This analysis derives the Position Value of each area, representing its earnings potential. But how can we get the full advantage of the Position Value to enhance our day-to-day operations? Below we summarise some key use cases.

Position Value in vessel fixing

In relation to spot chartering decisions, Position Value enables quick and easy like-for-like comparison of voyage options.

Consider the case of an Aframax opening in Trieste. She could embark on a transatlantic voyage to the US, generating a TCE of $30k/d for about 30 days. However, an east run catches our attention. How much should a Mediterranean-Singapore voyage earn to be more profitable? By checking the current Position Values - US Gulf at $700k and Singapore at -$550k - we can deduce that the Mediterranean-Singapore voyage needs to yield over $70k/d to surpass the transatlantic option, given the market conditions.

‍

Similar calculations can be applied to price correctly multiple discharging options for any fixture. Everything has a price; we just need to determine the right one.

Position Value can also be used as a tool to help price time charters as it quantifies the earning potential off a time charter delivery position and also quantifies the predicted, worst or best case, time charter redelivery position, allowing the lump sum debit or credit to be amortised over the time charter period to give a more accurate time charter hire rate. 

Using this method Signal are also able to price time charter hire values, in or out, accounting for the vessel’s earning potential on entry and exit which allows different delivery and redelivery positions to be compared, like for like.

Position Value as a catalyst in pool entry and exit flexibility

Position Value also plays a vital role in pooling, offering unique flexibility and commitment minimisation. By pricing the entry or exit positions of pool vessels, owners can seamlessly join or leave the pool anywhere, anytime without harming the pool partners or themselves and their earnings.  

Is it true that for technology-backed concepts it requires time to focus on the benefits of simplifying the output as it feels to be an underutilisation of such powerful algorithms. Similarly, in the early days, Position Value was calculated daily but this volatility created some uncertainty to Pool candidates and partners. Nowadays, Signal Maritime's algorithm compiles a monthly position value price list, ensuring that owners are aware of their vessel's position value credit or debit at the moment they provide entry or exit notice. 

In Signal pools, the position value operates as a zero-sum game. Any amount credited or debited to a vessel entering the pool is equally debited or credited to the other pool vessels. For example, if the Position Value of East Mediterranean is $150k, this means that the vessel enters the Pool in a better position vs. the Pool average, thus pool partners will benefit from her first voyage within the pool. As a result, she will be credited $150k. The same amount will be debited to the existing pool partners

One would say that the calculation methodology is a black box, so why would a pool partner trust an algorithm that generates values? Our reply to that is two-fold. Firstly, values are verified by humans, and shared with partners ahead of time enabling the chance to discuss any questions. Secondly, and most exciting, we offer a free seat to any of our partners at our chartering desk! We want our partners to see how our team operates and the way values are being derived and used. We feel this is a great chance to get closer to our valued clients and while working with them show how technological tools and AI can be applied in commercial shipping.

In conclusion, the implementation of Position Value in the shipping industry provides a valuable tool for optimising decision-making, enabling accurate comparisons, and promoting flexibility in pooling. By considering market conditions, historical data, and trading options, the Position Value concept enhances efficiency and profitability in day-to-day operations, ultimately contributing to the simplification of maritime businesses.

For more information of the Position value or our Pool, please get in touch with the contact form.

For the latest updates and insights, make sure to visit the Signal Ocean Newsroom website page. Click here to request a demo.

-Republishing is allowed with an active link to the source