1. The four shipping markets Dr D.Polemis

2. The decisions facing shipowners

3. The decisions facing shipowners

4. 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

5. 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?

6. The definition of a market

7. 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

8. 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?

9. 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

10. 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

11. Transaction
Two types:
The freight contract
The time charter

12. 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

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

14. The freight market

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

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

17. 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.

18. 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.

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

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

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

22. 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

23. The role of the ship broker

24. The revenues of the voyage, time and bare boat charter

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

27. 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.

28. 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 tones of coal), from to specified ports (say Rotterdam to Piraeus), in a particular time interval (say 3 months).

29. 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)

30. 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 .

31. 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.

32. Example: the Gencon charter – party

33. Example: the Gencon charter – party

34. Example: the Gencon charter – party

35. 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)

36. 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.

37. 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.

38. 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

39. 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)

40. 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

41. S&P MARKET

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

43. 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)

44. 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

45. 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

46. 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

47. 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

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

49. 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

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

51. The new building market

52. 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

53. The purchaser
Why entering the new building market?

54. 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

55. 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

56. The demolition market

57. 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)