A fee that vessel owners pay to charterers (parties that own cargo). The charterer’s price reduces their operation costs and covers other business costs, a commission that the agent of a shipping charterer receives to arrange for a ship’s loading.
How Address Commission Works
Generally, the party that owns a cargo (the charterer) will usually employ a shipbroker to locate the right ship to deliver the cargo to its destination; in turn, the shipowner will pay the shipbroker an agreed commission for their services. Eventually, the shipowner pays the charter with what is called address commission. Overall, this commission takes care of the charters’ general business and operation costs; therefore, the address commission helps reduce the charter’s total fees considerably, making the entire venture worthwhile.
In practice, the total fees and address commissions that the charterers and ship owners regularly incur depend on ship and charter type. For instance, a time charter enforces the costs related to the duration use of a vessel; on the other hand, the cargo’s total weight in transit determines a voyage charter’s fees. Note that the term “Free of Address” commonly refers to a charter that does not charge an address commission.
Overall, an address commission is generally comparable to a reduction in the freight rate because (when used) the charterers usually perform few special services in return. However, the charterers will typically deduct the amount before they pay the shipowner his dues. In this regard, the address commission acts as a rebate from the charterers for the shipping business. Note that the vessel is declared “free of address” if there’s no address commission.
Real-Life Example of Address Commission
Consider this situation: Charterer A wants to ship 50,000 tons of cargo. When sending his declaration to a broker, he indicates at the bottom of the cargo order that the ship owner’s calculation will consist of a 2.5% address commission. Consequently, the broker includes his 1.25%; by the time the shipowner receives the order, the total commission value reads 3.75%. The broker and charterer expect the shipowner to pay.
Of course, the shipowner finds that this cost is considerably exorbitant, but he must allow for it when calculating the amount for the required freight rate. After further analysis, the shipowner realizes that if he proceeds with the business, he’ll only make $50 per metric ton of the cargo carried; however, he must add a further $2 per metric ton. It is the only way he’ll cover his costs and pay the required 3.75% commission. Having done his math, the shipowner now decides to charge $52 to carry the cargo.
But the question begs: Why should a charterer charge the address commission when this merely increases the ship owner’s cost, making the entire freight way too expensive? Well, while it’s true the higher the charter’s commission, the higher the freight bill, there’s a specific matter to care for: most charters run large, costly shipping operations. While taking into account the existing tax laws and accounting principles, they have to find a way to keep their operations running—hence the charge. Of course, this means the more prominent the shipping department, the higher the address commission costs.
Significance of Address Commission
The address commission is essential in ensuring the shipping and cargo business continues efficiently. The commission ensures that charters who run large and busy departments can foot the bills, pay their workers, file their tax returns (viably), and maintain general operations without needless disruptions.
The address commission also helps ship owners and other players in the entire maritime business continue their day-to-day operations. Ultimately, the address commission is an effective win-win mechanism for ship owners, cargo owners (charters), brokers, and other industry stakeholders.