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Process for ship acquisition

Ship is high value capital assets with an average life span of 25-30 years. Acquiring this asset
requires great planning and timely execution. When a person/ firm decides to have a ship, they
must plan according to the various criterion such as size and type of the vessel, cargo to be
carried, required carrying capacity, new built or second hand. Shipping market is formed by
four markets that interact to form and are each part of the overlapping market:
1. The new building market
2. The freight market
3. The sale and purchase market
4. The demolition market

In case the firm decides to go for a new ship, it involves a huge process. Its described as
following

The Initial Planning

At this stage the ship owner will start planning for the new ship involving naval architects for
the design. Usually previous designs are considered however new and modern technology will
be incorporated that meets today´s tougher environmental regulations. A list of preferred
suppliers is established based on technology, quality and previous experience (Makers List). All
information will be package in to specification that is used as basis for as yards for a quotation.
When requesting a quotation a ship broker may be involved.

Ordering

Ordering of modern vessels requires huge amount of capital (a VLCC is priced at >$ 120
million) which means that the shipowner needs to secure ship financing. A negotiation
between ship owner and ship yard takes place and it may involve a ship broker to work
through the contract supporting the process. Once the contract is signed, engine builders &
equipment manufacturers will be involved. At this stage ship owner and ship yard makers lists
will be discussed and it will be decided on which equipment makers that will be invited to bid.
It will also be decided what classifications society that will certify the vessel.

Ship Building

1. Signing of Contract - When signing the contract a ceremony usually will be held at the
shipyard and this is a starting point for the shipyard to begin its process for building the ship.
Normally the first payment is done when the contract is signed. The ship is also officially given
a hull number and an IMO number which is unique identity that will follow the ship through
out its lifetime.

2. Production Design – The production design organizes the design information in the detailed
plans into respective component information. The production design enables the field staff to
meticulously control a large amount of components on site.

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3. Material and Equipment Purchase - At this stage yards starts purchase all material and
equipment need to complete the vessel. Since a tremendous volume of materials need to be
ordered to build a ship, it is vital to manage and supervise the delivery dates of those materials so
that the procurement is timely and accurate.

4. Production Plan – The production plan has a critical impact on manufacturing efficiency due to
the enormous amount of components and the large number of workers involved on the job site. It
is vital, therefore, to plan thoroughly so as to control and supervise the flow of materials, work
volume, job assignments and subsequent progress of the shipbuilding process.

5. Steel Cutting – Steel plates are being cut in to the parts that will form the the hull and deck
sections of the ship. The process of heating and bending a steel plate into curved shapes is of great
importance in shipbuilding, and requiries sophisticated skill and technique. Normally second
payment will take place at this stage.

6. Assembly and Mounting of Ship Sections – The cut steel is assembled into smaller blocks that in
turn are assembled into larger sections that mounted together to finally become a complete ship.

7. Launching – When all the blocks are mounted and jointed, launching is the next stage. While
the launching at a dock simply means filling the dock with water to float the ship, the launching
from a building berth is a very impressive and exciting sight to see since the ship slides its way
majestically into the sea. This is one of the most thrilling moments for all involved with the
shipbuilding process. Third payment will normally take place during launching.

8. Finishing of the Vessel – After launching the vessel is finished up at the quay. Starting with
finishing work of accommodation and control sections, every equipment and instrument is
checked and re-examined in practice. We are now in the final stretch of shipbuilding.

9. Sea Trial – At sea trial the ship and ship equipment performance is tested and the result is
kept as a performance record of the vessel.

10. Delivery – A new ship is born. After the delivery ceremony, the captain, chief engineer and
crew embark for the ship’s maiden voyage. Final payment is done at delivery.

11. Warranty - Warranty period of a new ship is usually 12 – 24 months depending on the
contract.

Process of ordering a ship is as follows

1. Certification: To protect the life of sea farers as the well as the ships there are many
codes and conventions are in force. To make sure these standards are met there is a
large amount of certification required to prove that a ship, its personal, businesses, and
shore side staff meet the national, regional or international grade. Onboard ships,
certificates can range from emergency pollution plans and ship security plans to
construction certificates and certificates of insurance. Other certificates can cover the
certificate of registry, specifying the nation registry of the vessel, and certificates of
survey.
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2. Classification Societies: They are NGO’s that set and apply design and construction
rules during construction to ensure that vessels’ structures and their Shipbuilders
comply with those rules. On delivery of a ship, classification societies institute a
programme of frequent inspections and Surveys during the working lives of ships, to
check that their structures remain safe. Many nations have their own classification
societies working closely with the Flag State of that country. However, the ten leading
societies are all members of the London-based International Association of
Classification Societies (IACS). Many Marine Insurance underwriters insist that vessels
be classed by an IACS member as a condition of cover.
3. Engine and Equipment Manufacturer: Engine is the essential part of the ship in it long
hauling journey. Deciding the ship engine based on the rules and conventions is an
essential part. Other equipments like safety equipments, cargo handling equipments,
mooring equipments etc has to be decided in advance to meet the specific requirement
of the ship.
4. Finance: To finance a ship purchase, or indeed any asset purchase, shipping companies
will look to the management of money, banking, investments, and credit to supply funds
or capital. International banks will often be the first port of call, as they provide a full
range of specialist banking and finance facilities. They can advise on, structure and
arrange the financing for the acquisition of shipping capacity. Services offered can
include ship mortgage finance, structured finance for more specialized needs and
property and corporate finance. Importantly for a truly international industry such as
shipping, banks will offer accounts in all major foreign currencies and may offer tailor-
made derivatives for the shipping industry. Traditionally, ship finance markets have
been centred on Germany, Cyprus, the Nordic countries and Greece, but as Asia has
increased in importance in the shipping markets, so to has the need for finance there.
5. Shipyards: Management and organisational skills are essential in the shipbuilding
process, as a typical ship will involve the assembly of millions of parts and the
employment of a heavy workforce, some of which may be contractors. Only some
shipbuilding processes lend themselves to automation, so shipbuilding remains a
relatively highly-skilled and labour intensive process. On average the number of
manhours required for the production of a ship varies from 300,000 to 1.5 million and
the typical production period for a bulk cargo ship may be of the order of six to nine
months. Construction of a cruise ship or a liquefied natural gas carrier could take
considerably longer at two years or more.
6. Marine Insurance: Every cargo carried around the world in a ship is of value, whether
that be a container full of microchips from Japan, or a chest of drawers that caught the
eye of a European tourist holidaying in Australia. The owners of both cargoes will place
a value on their products, however small or large that may seem comparatively. Should
the unthinkable happen to that cargo, or indeed the ship as a whole, the cargo and ship
owners will not want to out of pocket and will want to be financially covered.

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Marine Insurance, the oldest form of insurance, protects shipping companies and cargo owners
against the loss of a ship and/or cargo. Typically, the owner of the cargo will be compensated
for losses sustained from fire, shipwreck, and so on, but not for losses that can be legally
recovered from the carrier. Usually, marine insurance is divided into two divisions: hull and
machinery and Protection and Indemnity. Other forms of marine insurance are designed to
cover other risks such as the cost of delays resulting from strikes and losses resulting from
trading a vessel in regions affected by war.

Financing Option for new building

For a buyer wishing to finance the purchase a new building by borrowing, there have been
two sources of traditional finance;
1. Bank Finance
2. Combination of Buyer’s Credit and Seller’s Credit

Shipbuilding contracts normally provide for the buyer to pay for the construction and delivery
of the ship in installment over the duration of the contract.

Using seller’s credit Cash contract

Signing of contract 5% Signing of contract 15%
6 months after contracts 4% Cutting of steel plate 15%
Beginning of keel lying 4% Beginning of keel lying 10%
Launching 4% Launching 10%
Delivery 3% Delivery 50%
Post delivery (Yard credit) 80%
Total 100% Total 100%

Second Hand Purchase

In case of second ships the ship owner may either go for to the market directly or through
brokers. With the introduction of internet, there is a direct transaction between the strong hold
companies in the industry. The entire process works in an organized manner. Ship owner
decides the capacity and class of the ship based on his requirement. The acquisition of the
second hand ship may be for operation for own product or for providing it for chartering.
There are various factors that are taken into consideration by the ship owner before going for a
second hand ship.

1. Age of the vessel

2. Previous accident history
3. Insurance history
4. Hull type
5. Cargo carried previously

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FLOW DIAGRAM FOR SHIP ACQUISITION PROCESS

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