Chapter 5 - other 3 markets

Question 1

Who are the participants in the sale and purchase market?

Answer 1

1. Ship owners - bring ship to market to be sold
2. Purchasers - buys ship to fulfil need/investor interested in investment potential
3. Brokers - gets instruction from owner and distributes info to clients

Question 2

Discuss the five stages of the sales procedure

Answer 2

1. Putting the ship on the market - buyer/seller appoints broker or handle themself. Particulars of ship for sale circulated
2. Negotiation of price and conditions - strong market = quick decision; weak market=more time to seek info
3. Memorandum of Agreement - Once offer accepted, MOA drawn up setting out terms of sale. Sets out administrative details (when, where) and contractual rights.
4. Inspections - buyer or his surveyor makes inspections, with divers or dry doc.
5. Closing - ship delivered and transfer of funds

Question 3

How are ship prices determined?

Answer 3

Sale and purchase market thrives on price fluctuations (volatility).
*Asset play - profits from well-timed buying and selling activity is important source of income for investors.
*Bankers interested in hull values for collateral for loans
*Wise to sell at peak
*Distress sales occur when market is depressed and cash flow under pressure

Question 4

Which four factors influences the price dynamics of merchant ships?

Answer 4

1.Freight rates - primary influence on ship prices. High=keep, high=high value
2. Age - Ships depreciate to scrap over 15-20 years at 5-6% yearly. Economic life shortened due to corrosive cargo, poor design, inadequate maintenance. Depreciation reflects loss of performance, higher maintenance costs, degree of technical obsolescence and future economic life
3. Inflation - Causes value of ship to decrease less proportionately
4. Expectations - buyers and sellers may first hold back to see what will happen and then suddenly enter market when market is on the move. Quick swings from depression to intensive activity.

Question 5

Why are merchant ships continuously valued?

Answer 5

*Banks lending against mortgage need value for collateral
*When public offering of equity occurs, value of fleet needed
* Leases require residual value of ship at end of loan period

Question 6

How does the newbuilding market differ from the sale and purchase market?

Answer 6

Both deal in ships, newbuilding market trades in ships which do not exist

Question 7

What are the implications for trading non-existent ships in the newbuilding market?

Answer 7

1. Specification must be determined - standard vs bespoke (expensive)
2. Complex contractual negotiation - takes up to 12 months, only few building locations. Contract focuses on price, specifications, terms of contract, finance offer by shipbuilder
3. Ship not available until 2-3 years (expectations are important)

Question 8

How are newbuilt ships priced?

Answer 8

By supply and demand
1. Demand side - freight rates, price in sale and purchase market, liquidity of buyers, credit availability, expectations
2. Supply side - production costs, number of berths, size of order book

Question 9

Discuss the demolition market

Answer 9

*Ships that cannot be sold in sale and purchase market
*Owner normally appoints broker
*Buyers in the East
*Prices determined by negotiations and depends on local steel market
*Prices vary by type of ship and where ship is