CHAPTER 3

THE 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 market

Trades second-hand ships

(transaction
between
ship-owner
inventor)

The freight market

Trades sea transport

In

The demolition market

Deals in scrap ships

In

and

No change in
cash balance

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 sellers bank.
- The value of a ship is under the influence of 4 factors: freight rates, age, inflation and shipowners 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.