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:
1.
The Newbuilding market
2.
The Freight market
3.
The Sale & Purchase market
4.
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

Bulk carriers

Container ships
different demand
and supply
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 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
1. The trip charter (a single voyage)
2. 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
 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-toprincipal 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
1)
Putting the ship on the market
2)
Negotiation of price and conditions
3)
Memorandum of agreement
4)
Inspections
5)
The closing
The ship and the money are simultaneously transferred
1)
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
=> risk
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)