The four shipping markets Dr D.Polemis

The decisions facing shipowners

The decisions facing shipowners

The decisions facing shipowners In this example the shipowner trades in four different markets: The Newbuilding market The Freight market The Sale & Purchase market The Demolition market

Aims of the Chapter How vessels are chartered? How does the S&P market operate and what determines the price of a vessel? What's the difference of buying a newbuilt and a second- hand one? How did selling for scrap differ from selling it for continued trading?

The definition of a market

The four shipping markets the Freight market trades sea transport the S&P market trades second - hand vessels the newbuilding market trades new vessels the demolition market deals in scrap vessels

The four markets are closely related Why? => The same ship owners are trading in the same market. A change in freight rates will affect the second-hand market and the new building market. Finally the scrap market will be involved. How fast the markets affect each other? Is any possible time lag exists?

The freight market The freight market is a market place where sea transport is bought and sold. The transaction takes place by using phones, telexes, computers (internet) etc. Short and Long term freight market

Short term – The freight market Sub markets Tankers different demand Bulk carriers and supply Container ships Additional Distinct regional markets It takes time for ships to move around the world

Transaction Two types: The freight contract The time charter

Transaction: (1) The freight contract: The shipper buys transport from the ship owner at a fixed price (per ton of cargo). The shipper prefers to pay an agreed sum and leave the management of the transport to the ship owner

Transaction: (2) The time charter The ship is hired by the day from ship operator. => The Charterer manage the transportation their selves

The freight market

The Baltic shipping exchange The Baltic Shipping Exchange started by trading commodities and shipping services. Exchange Markets Bid and Ask Demand and supply dynamics

What is the freight market? The market place where sea transport is bought and sold, though the business is mainly transacted by phone, email and mailing services. There is a single international freight market but there are separate freight markets for different ships.

Keep in mind In the short term the freight rates for tankers, bulk carriers, container – ships, gas tankers and chemical tankers behave differently. In the long run, what happens is that every sector affects and is affected by the others.

The shipper or charterer The freight market The participants The ship owner The shipper or charterer The shipbroker In this market the shipowner has the vessel for hire, the charterer has the cargo to transport, and the brokers put the deal together.

The ship owner The ship owner is affected by the: Ship’s characteristics Ship’s availability

The ship owner Ship’s characteristics 1) particular speed 2) particular cargo capacity 3) particular dimensions 4) particular cargo handling gear

The ship owner Ship’s availability 1) free of cargo 2) location 3) dates

The shipper or charterer Shipper’s or charterer’s characteristics 1) the owner of a specific cargo 2) a company that needs an extra ship Cargo’s characteristics will determine the type of the shipping contract required

The role of the ship broker

The revenues of the voyage, time and bare boat charter

The role of the ship broker Contractual agreements 1) voyage charter 2) contract of affreightment 3) time charter 4) bare boat charter

The voyage charter It provides transport for a specific cargo from port A to port B, for a fixed price per ton. If the voyage is not completed within the terms of charter party there will be a claim. The calculation of demurrage, if any, normally is easy.

The contract of affreightment The shipowner agrees to carry a series of parcels for a fixed price per ton. E.g. to transport a specific volume of cargo (say 50.000 tones of coal), from to specified ports (say Rotterdam to Piraeus), in a particular time interval (say 3 months).

The time charter The time charter give the charterer operational control of the ship that carries his cargo. In this case the shipowner is responsible for the management of the vessel. We have two types of time charter The trip charter (a single voyage) The period charter (months or year)

The bare boat charter The bare boat charter give the ability to the company (either a management company or a cargo owner’s company) to have the full control of the ship. The charterer pays all operating and voyage costs and manages the ship over a specified period (usually 10 – 20 years). In most cases the owner of the vessel is a financial institute .

The charter – party The charter party sets the terms on which the business is done (i.e. the terms of the contract). The charter – party (or the cargo contract) is an important document in the shipping industry and must be expertly drawn up in a way that protects the position of the contracting parties.

Example: the Gencon charter – party

Example: the Gencon charter – party

Example: the Gencon charter – party

Derivative markets Types of Derivatives Freight derivative markets Forward contracts Future contracts Option contracts Freight derivative markets Freight futures (standard products based on indexes) Forward freight agreements (transportation agreements)

FFA’s Option contract on freight rates traded on Baltic exchange, through which shippers and ship owners hedge against the volatility of the ocean freight market. It is a principal-to- principal contract used by two parties to bet on the price of a particular freight-route on a particular date.

FFA’s A forward freight agreement (FFA) is a financial futures contract that allows ship owners, charterers and speculators to hedge against the volatility of freight rates. It gives the contract owner the right to buy and sell the price of freight for future dates. FFAs are built on an index composed of a shipping route for tanker or a basket of routes for dry bulk, contracts are traded ‘over the counter’ on a principal-to-principal basis and can be cleared through a clearing house.

What is a Freight Forward Agreement? Can be ‘Over-the Counter’ agreement or traded on an Exchange via a screen ‘Contract for Differences’ (CFD) – means cash settlement Uses a specified voyage Fixes a price today for a defined future period Position closed out against an Index or Broker assessment over the defined future period

FFA Compared to Time Charter Pros No physical performance risk More liquid than Time Charter With standard terms, quick to do Flexible volumes, regions and selective timings Keeps control of your physical assets Cons May not get perfect match with desired voyage/timing Can have bunker price exposure (unless hedged)

Risk management options in shipping Option A: Do nothing & fix spot High risk / Unpredictable Option B: Timecharter, COA or long term management Inflexible / inefficient pricing Option C: Hedge with FFA and use profit / loss to pay for spot physical deal Opportunities to cover requirements, quickly fixed and flexible to allow you to alter your position should it change

S&P MARKET

The sale and purchase market Second hand ships trading The ship owner The purchaser The shipbroker

The ship owner The supplier of the market. Why to sell? 1) the ship may no longer suit his trade (example) 2) Ship owner’s policy of replacing vessels in a certain age (why?) 3) there is an expectation about the market (fall) (example) 4)the need for cash (connect this with cycles)

The purchaser Shipping companies Shippers Freight market speculator traders - The purchaser is looking for a ship of specific characteristics such as type and capacity - Sometimes the purchaser acquires a ship because he just felt that it was the right time

The role of the shipbroker Most of the sales and purchase transactions are carried out through shipbrokers Ship’s characteristics - Hull specifications Machinery specifications Capacity specifications Class specifications General equipment Type specifications

The sell and purchase market 5 Stages Putting the ship on the market Negotiation of price and conditions Memorandum of agreement Inspections The closing The ship and the money are simultaneously transferred

Putting the ship on the market => Selling – purchasing => Using a broker => By themselves 2) Negotiations of price and conditions The market’s conditions affect the negotiation => Strong market - quick decision - lack of information => Weak market - time availability - surplus of information

Factors affecting the sale and purchase market Freight rates Age Inflation Expectations Example How the expectations affect the market within an economic cycle?

Valuing merchant ships Ship’s characteristics => recent sales of similar vessels Ship’s Type - Survey status Size - Equipment Age - Specifications Yard of build - Physical condition

Valuing merchant ships Scenario Analysis => Good, moderate, bad => Using probabilities Calculating the residual value => Initial cost of ship => Depreciation rate => Inflation rate

The new building market

The new building market The new building market trades is ship which does not exist. Note that: - The ship will not be available for 1 or 1,5 years from the contract date Note: market conditions are changing => risk The ship’s specification must be determined in the very beginning

The purchaser Why entering the new building market?

The purchaser Why entering the new building market? Second hand prices may exceed new building prices Specific industrial project Market needs for vessels with certain size and specification (not existing in the second hand market) Shipping companies’ fleet replacement policy

The supplier Shipyards Size and technical capacity Number of employees Small and mayor shipyards Note that some shipyards are specialized in one particular type of ship. But there is a great shipyard flexibility

The demolition market

The demolition market The ship owner The scrap yards The broker Prices are determined by negotiation and depend on the availability of ships for scrap and the demand for scrap metal Please see related article on the intranet (journal, Maritime policy and management)