What is Demurrage?
Demurrage is the charges paid by the charter to the vessel owner when there is a delay in the operation of loading or unloading the vessel. It is a penalty, charged for the delay or any other violation of the agreement signed between the two parties.
The term demurrage is also used in currency trading. It refers to the charges payable for owning or holding currency or currency-related commodities over a specific period of time. It is the carrying cost of money and important for economic growth and currency circulation.
When is Demurrage Charged?
Shipping
A vessel owner makes money by transporting goods for individuals chartering the vessel. If the vessel is unduly occupied, then the vessel owner requires compensation for the lost ability to earn additional revenue. As such, the parties may include clauses in the contract addressing demurrage.
Currency and Commodity Trading
In the context of currency trading, demurrage is used to incentivize continued trading of the currency. When it is paper currency, the demurrage can be charged as taxes, payable periodically. Stamp tax on currency holding is one such tax. In the case of commodity money, such as gold, the demurrage is the cost of storing the gold. The charges are usually calculated on the basis of the value of the stored commodity and the time period for which it is being stored. Per hour to per annum, the rate may vary. Circulation of currencies and commodities is important for the growth of an economy. If someone holds a large sum of currency for a long period of time without circulating it in the market, the economy is affected adversely. Currency being held loses its velocity and cannot have a multiplier effect in the economy. The demurrage was introduced to discourage people from hoarding cash and commodity money. Say, for example, John Brown is a businessman who has stored a large amount of gold and silver in the form of bars. He keeps these golds and silver with a third-party company and the company is responsible for the safety and security of those. John needs to pay a charge for the service to the company. A demurrage is also associated with this. He needs to pay a charge periodically for holding the gold and silver. Along with the storage and security, he also needs to pay the demurrage fee. The amount depends on the size and value of the commodity. He may consciously choose to pay the fee if holding the gold and silver is a good investment for him considering the high and ever-increasing value of the precious metals.