CHAPTER 3THE FOUR SHIPPING MARKETS

The chapter 3 introduces 4 shipping markets with an aim to explain how the four markets work from a practical viewpoint and to identify the difference among them.3.1. The decision facing shipowners. The ship-owners have difficult decisions to make during the process of doing their business in shipping market. How to avoid losses and get profit in the volatile shipping market is always a big question to them..3.2. The four shipping markets (P78+79)In shipping there are four shipping markets trading in different commodities

Name Mission Cashflow

The new-building market Trades new ships Out

The sale and purchase marketTrades second-hand ships(transaction between ship-owner and inventor)

No change in cash balance

The freight market Trades sea transport In

The demolition market Deals in scrap ships In

- The waves of cash flow among the 4 markets drive the shipping market cycle (p.79).

Freight market cycle- The whole commercial process is controlled and coordinated by cash-flow between markets

(figure 3.1).- Cash is the ‘stick and carrot’ which the market uses to drive activity in the required direction.3.3. The freight market (p.81-95)

- In freight market, there are 3 main participating parties: Shipowners have their vessels for hire. Charterers have cargo to transport. Brokers puts the deal together.

- The freight market has 2 different types of transaction (p.82-83):1. Freight contract

In which shipper buys transport from ship-owner at the fixed price per ton of cargo Suits shippers who prefer to pay an agreed sum and leave the management of transport

to the ship-owner.2. Time charter

Under which the ship is hired by the day. For ship operators who prefer to manage the transport themselves.

- Four types of contractual agreement are commonly used (p.83-85):1. Voyage charter:

Ship-owner contracts to carry a specific cargo in a specific ship of a negotiated price/ton.

2. Contract of affreightment Ship-owner contracts to carry a series of cargo parcels for an agreed price/ton.

3. Time charter The time charter is an agreement between owner and charterer to hire a ship, complete

with crew, for a fee/day, month or year. Operating cost of the ship is covered by the ship-owner while the charterer pays all

voyage expense.4. Bare boat charter

Hiring out the ship without crew or any operational responsibility for a fee/day, month or year.

The charterer manages the vessel and pays all operating and voyage costs.

- Once a deal is fixed, a charter party is prepared setting out the terms on which the business is to be done (p.86) Actually, it would be too time consuming to develop a new charter party for every

contract, particularly voyage charters, so the shipping industry uses standard charter parties that apply to the main trades, routes and types of chartering agreement (e.i. BIMCO. Gencon) (p.87-88).

The rates at which charters are fixed depend on market condition and the free flow of information reporting the latest developments of freight market. Therefore, in this section the author: Reviews the way in which charter rates are reported (p.89-91), Introduces 3 different units of measurement for freight rates and charter rates

including voyage rate statistics (dry carrier), time charter rates (trip/a time distance) and Worldscale (tanker) (p.92-93),

Represent The Baltic Freight Index (BIFFEX): a statistical index covering freight rates on eleven different trade routes such as grain, iron ore, coal and trips charter. it is

enable shippers, ship-owners and charterers to hedge against sudden changes in the freight rates.

3.4. The sale and purchase market (p.96-106)- In this market, ships worth tens of millions of dollars are traded like sacks of potatoes at the

country market.- Participating parties: shipowners, inventor (usually other shipowners) and broker.- The procedure for selling/buying a ship can be sub-divided into the following 5 stages (p.97):

1. Putting the ship on the market. Particulars of the ship for sale are circulated to interested parties in the market by the buyer/ seller/ his broker appointed.

2. Negotiation of price and conditions.3. Memorandum of Agreement: is drawn up setting out the terms on which the sale will take

place once the offer has been accepted. This sets out the administrative details for the sale (where, when and on what terms) and lays down certain contractual rights.

4. Inspections: the buyer or his surveyor makes a physical inspection of the ship and of the Classification Society records for information about the mechanical and structural history of the ship.

5. The closing: the ship is delivered to its new owner who simultaneously transfers the balance of funds to the seller’s bank.

- The value of a ship is under the influence of 4 factors: freight rates, age, inflation and ship-owners’ expectation for the future (p.101-103).1. Freight rate rises/falls proportionally to ship price.2. The older ship grows, the less its worth is.3. Under the inflation effect, the market price line moves progressively.4. The ship-owners’ expectation accelerates the speed of change at market turning points (i.e.

the market can swing from deep depression to intensive activity in the space of only a few week and vice versa).

- The movement of prices is often not a leisurely process. Peaks and troughs tend to be emphasized by the behavior of buyers and sellers.

- Valuing current merchant ships is undertaken by sale and purchase brokers on the basic of checking the physical characteristics of the ship and recent sales of similar vessels. Bigger ships are generally worth more than smaller ships in a specific time. Equipment in ships is very important basic to estimate the ships’ worth.

- To calculate the future value of ships, it is important to consider 3 determinants: the depreciation rate, the rate of inflation and the market cycle. However, it is very difficult to predict these factors.

3.5. The new-building market- Although also dealing in ships like the sale and purchase market, the newbuilding market

trades in ships which do not exist and must be built. - The sellers in this case are not other shipowners, but shipyards.- The negotiation is very complex. Sometimes an owner appoints a broker to handle the

newbuilding, but many owners deal direct. The buyer may approach the shipbuilding market from several directions. However, the contract negotiation can be divided into 4 areas on which negotiations focus: Price Specification of the vessel The terms and conditions of the contract The newbuilding finance offered by the shipbuilder.

- Once the preliminary negotiations are complete, a ‘letter of intent’ is often drawn up as a basic for developing the details of the design and the construction contract. The shipyard contract is often drawn up on a standard form. Two commonly used forms: the AWES form and the SAJ form.

- The shipbuilding prices are as volatile as second-hand prices and are closely correlated with them.

3.6. The demolition market- The procedure is broadly similar to the second-hand market, but the customers are the scrap

yards rather than shipowners.- The prices are determined by negotiation and depend on the availability of ships for scrap and

the demand for scrap metal.- Old or obsolete ships are sold for scrap, often with speculators acting as intermediaries

between the shipowners and the demolition merchants.3.7. Summary- This charter introduced 4 shipping markets namely the newbuilding market, the sale and

purchase market, the newbuilding market and demolition market which work together and are linked by cashflow.

- Starting from the definition of a market place, the chapter shows how these markets go about the business of managing the supply of ships.