Chap 2 Overview of ship Acquisition & Ownership

1. Chap 2Overview of ship Acquisition & Ownership

2. What is Shipbuilding • The construction of ships and floating vessels. It normally takes place in a specialized facility known as a shipyard. • Shipbuilders, also called shipwrights, follow a specialized occupation that traces its roots to before recorded history. • Shipbuilding and ship repairs, both commercial and military, are referred to as "naval engineering". • The construction of boats is a similar activity called boat building.

5. Shipbuilding Statistics

6. Shipbuilding Market • Four years have passed since the beginning of the economic crisis which brought a dramatic fall in the volume of shipbuilding orders andtheir prices. • 2012 saw an even greater fall in orders of 40% compared to the previous year and a further decrease in newbuilding prices of 5% to 10% compared to 2011

9. In 2012 Only 49m dwt (or about 852 ships) were ordered compared to 89m dwt (or about 1,375 ships) in 2011. • in 2009 - record was lowest with 34m dwt reached. • 2003–2008 the average order levels was about 140m i.e the boom years of and. • It is below the world newbuilding capacity level. Deliveries dropped for the first time with about 149m dwt compared to 159m dwt in 2011 and 149m in 2010. • The world orderbook continued its decline from 358m dwt at the end of 2011 (271m gt or 5,217 ships) to 245m dwt • (164m gt or 3,766 ships) at the end of 2012. These orders now represent only 17% of the world fleet in service estimated to be 1.53m dwt at the end of 2012, compared to • 25% in 2011 and more importantly 53% in 2008

10. China, with a 45% market share, is in first position ahead of the other shipbuilders with an orderbook of 111m dwt(67m gt) at the end of 2012 compared to 154m dwt (90m gt) at the end of 2011. • South Korea holds second place with a 29% market share and an orderbook of 70m dwt (53m gt) compared to 109m dwt (53m gt) a year earlier • Japan has held on to the third place with an 18% marketshare and an orderbook of 45m dwt (28m gt) compared to61m dwt (36m gt) in 2011 http://www.brs-paris.com/annual/annual-2013/pdf/02-newbuilding-a.pdf

11. European shipbuilders had an orderbook of 3m dwt (4.5m gt) compared to 4.6m dwt (5.5m gt) in 2011, representing no more than 1% of the market. • The rest of the world’s shipyards held a 7% market share with 17m dwt (11m gt) compared to 24m dwt (15m gt) a year earlier.

12. Demand levels which fell below construction capacity increased competition and lead to a fall in prices of about 5% to 10% in 2012. • Shipbuilders resigned themselves to accepting orders at less than building cost in order to secure the continuity of their operations, but • buyers placed greater importance on safety and gave priority to quality shipyards.

13. * Contract cancellations continued but the volumes involved receded to about 10m dwt compared to 21m dwt in 2011. • The whole industry is under pressure. Several shipyards have ceased to operate through a lack of orders. • Some more shipowning companies have asked for bankruptcy protection. • Many banks that have been traditionally involved in shipping have decided to hold back and to refrain from financing new acquisitions. • Some, such as SociétéGénérale,have even decided to dispose of their maritime portfolios

14. ANNUAL REVIEW IMF GDP and world trade growth forecasts (%) 2011 2012 2013 2014 World 3.9 3.2 3.5 4.1 USA 1.8 2.3 2.0 3.0 Japan -0.6 2.0 1.2 0.7 Euro area 1.4 -0.4 -0.2 1,0 China 9.3 7.8 8.2 8.5 India 7.9 4.5 5.9 6.4 World Trade 5.9 2.8 3.8 5.5 IMF - Jan. 2013

15. THE ECONOMY, MARITIME TRADE AND FREIGHT MARKETS IN 2012 • Global economic growth declined further to 3.2% (2012)3.9% ( 2011) and 5.1% ( 2010). * Trade progressed at a similar level of about 2.8%, far behind 2011 (5.9%)and 2010 (12.6%) • Dry bulk freight rates remained low. • The Baltic Dry Index (BDI) was close to its all time historic low with 918 points compared to 1,548 in 2011 and 2,758 in 2010

16. Baltic Dry Index (BDI) The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides "an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a timecharter basis, the index covers Handysize, Supramax, Panamax, and Capesizedry bulk carriers carrying a range of commodities including coal, iron ore and grain.

18. * Baltic dry index, or BDI for short, is a number issued daily by the London-based Baltic Exchange to measure the rates charged for chartering the giant ships that carry major raw materials, i.e. coal, iron ore, crude oil, and grain. * Despite of its name’s suggestion, the index is not restricted to Baltic Sea countries. It tracks worldwide international shipping prices of various dry bulk cargoes. • This index is updated five days a week and is readily available for your reference. How to find it? From direct Baltic Exchange's website, or from some other online resources like Bloomberg • http://www.container-transportation.com/baltic-dry-index.html

19. Tanker Market • The tanker sector saw a small breakthrough with an improvement in freight rates in all vessel sizes except MRs. • However, earnings fell short of allowing the depreciation of investments. • Rates in the containership sector decreased as a whole compared to the previous year. • The number of containerships laid up, which had gone from 11% to 2.3% of the fleet in service between 2009 and 2010, rose to 4.5% at the end of 2012

20. ORDERS FOR STANDARD VESSELS IN 2012: BULK CARRIERS, TANKERS, CONTAINERSHIPS + The 37m dwt (consisted of 22m dwt of bulk carriers, 10m dwt of tankers and 5m dwt of containerships)of new standard orders in 2012 compared to 72m dwt in 2011. + There was a sharp fall in orders for bulk carriers and containerships whereas, in 2011, they were more or less identical to those of 2006, the second best year of the 2003 to 2008 boom

21. * Tanker orders increased from 8.4m dwt to 10m dwt, although it should be remembered that in 2011 they had never been so low even when compared to 2009, a catastrophic year as everyone remembers. • The bulk carrier orderbook reached 125m dwt at the end of 2012 compared to 199m dwt at the end of 2011. • The ratio of tonnage under construction to the fleet in service continued to fall reaching 18% compared to 34% a year earlier and 61% at the end of 2009. • Chinese shipbuilders accounted for 55% (an increase) of the orderbook ahead of the Japanese (29%, an increase) and the Koreans, 6% (a fall).

22. Container Vessels • The containership orderbook, which had increased in 2011 for the first time since 2006, receded from 51m dwt at the end of 2011 to 41m dwt at the end of 2012. • Tonnage under construction by teu represented about 16% of the fleet in service. • This market remains dominated by South Korea with 56% (a fall) but still far ahead of the Chinese shipyards with 33% (an increase) and the Japanese with less than 2%.

23. NEW ORDERS IN 2013 The total number of orders in 2012 amounted to 49m dwt. What will be the volume of orders in 2013? • Some shipyards have closed or have gone bankrupt. Others can no longer take on orders due to insufficient financial support from the banks or simply because they have lost their potential clients’ confidence. Others have diversified out of building merchant ships such as HHI, DSME, and SHI in Korea. • Others still avoid certain types of ships because their building cost no longer correspond to market prices, for example the Korean shipyards which abandon the building of bulk carriers (only 6% of the market at the end of 2012 compared to 23% at the end of 2008). • There has also been a realisation on the part of many shipbuilders that building capacity needs to be tailored to demand. It is interesting to note that a number of shipyards in China and Japan have decided to reduce their orders by 30% to 50%. This trend is less noticeable in Korea (HMD, STX).

24. Korea Offshore & Shipping Association - KOSHIPA

25. Community of European Shipyard

26. Sale and purchase of ship • * is one of the important activities in the shipping industry. It involves a huge amount of money in term of more than hundred millions US dollar and it requires different kinds of profession knowledge like knowledge of particular type of ships and functions, legal knowledge as well as dealing and bargaining knowledge. • In order to reduce the disputes and smoothen the sale and purchase procedure, normally the shipowner (seller) and the buyer will appoint brokers to be a middlemen to handle the transaction. • There are three main stages for the sale and purchase of a ship which include the negotiation and contract stage, the inspections stage and the completion. • From different stages, it includes different important issues and regulations. In following, the article will discuss all these stages of Sale and purchase of ship and all the important elements http://en.wikipedia.org/wiki/Sale_and_purchase_of_ship

27. Stages of S & P • 1.Negotiation and contract stage • 2 Inspections stage • 3 Completion • 4 Protection of buyer • 5 Procedure to terminate the contract • 6 Remedies of seller • 7 Remedies of Buyer • 8 Duties of the seller • 9 Duties of the buyer • 10 Conclusion • 11 References

28. Sale & Purchase of Ship AIM. * To ensure a thorough knowledge and understanding of the practice and etiquette of this specialist sector of shipbroking, dealing with newbuilding contracts, second-hand sales and purchases and demolition sales. • To develop relevant communication skills THE SHIP * All types of ships. * Terminology of measurements including dimensions, tonnages, cubic capacities, TEUs. * Types of machinery, cargo handling and any other specialised equipment. * Current and future development of vessels new and specialised designs including innovations. * The effects of recent legislation.

29. GEOGRAPHY * Geographical location of newbuilding yards, demolition buyers and areas where particular types of vessels are utilised. Cargoes and trading routes, physical or meteorological limitations on dimensions and ship types. REGISTRATION AND CLASSIFICATION * The main and ancillary purposes of ship registration. * Requirements, advantages and disadvantages of various flags; dual flagging. * The role and function of classification societies and classification society registers. • When and how classification may be involved in a ship’s sale. • PARTIES INVOLVED * Shipowners – Development of differing types of owning groups e.g. individual entrepreneurial owners, corporate structure, conglomerates, investment groups, pools. * Other parties involved – brokers, charterers, ship breakers, bankers, other financiers, lawyers, notaries, consuls and registrars.

30. MARKETS * The markets for new building, second-hand and demolition sales and purchases and their inter-relationships. * Factors affecting the market including natural catastrophes, environmental,aid programmes, political crises. Tramps and liners. National traditions and weaknesses. * The production and interpretation of both statistical and written market reports.

31. CONTRACTS AND DOCUMENTATION • The necessary content of a contract for the sale and purchase of a ship whether for new building, second hand or demolition, including detailed understanding of fundamental clauses. • Drafting summaries of agreements and Memoranda of Agreement. • All standard forms currently in use as a base for a contract and necessary or desirable additional extra clauses or alterations. • Procedures,reasons for and form of documentation produced by buyers, sellers and other parties in connection with completion of a sale and delivery and legal transfer of a ship. • The different certificates and compliances that might be relevant the time of sale of a ship. Issuing authorities and validities including compliance with international and national authorities.

32. NEGOTIATION * The conduct, etiquette,ethics and procedures of a negotiation. Translating a principal’s requirements into suitable clauses. * Drafting offers with the correct sequence of clauses, counter offers, specific clauses, recapitulations,completion agenda and understanding their implications. • The importance of information given ‘without guarantee’. FINANCE AND INSURANCE * The information needed by a financier when considering a project. * Providers and different methods of financing including mortgages, leasing and bareboats * Means of providing security for loan. * Currencies, interest and exchange rates. * The role and function of insurance in sale and purchase transactions including P & I insurance.

33. VALUATIONS * Role and legal position of the valuer, liabilities and protection. • Reasons for and types of bodies requiring valuations. Salient facts needed to carry out valuations. Methods of assessing values. LEGAL ASPECTS OF SALE AND PURCHASE * Law relating to sale and purchase. Areas of dispute including: Validity of agreement; * Entitlement to commission; Rejection of the vessel by buyer; Condition of the ship on delivery; Validity of Notice of Readiness; Description of vessel in the preamble; ramifications and significance; Brokers’ liability. * The effect of legislation on both existing vessels and new buildings or construction.

34. Negotiation and contract stage • The negotiation and contract stage are the first two steps of the sale of a ship. normally carried out by the brokers appointed by both buyer and seller. • Broker of the buyer will make the info exchange with the seller's brokers to make an invitation to offer. The main concerns in this stage of both parties are the pricing, the particulars of the ship and the lay-days of the transaction. • * After this, both parties will have the price bargaining and negotiations of the main terms of contract. If the basic terms are agreed upon by both parties, both parties can further discuss and bargain the main terms of contracts.

35. After all the details are agreed through numerous communications, a formal contract for the sale of ship - Memorandum of Agreement (MOA) - will be drawn up. * There are some standard forms, contracts for the MOA like Norwegian Sale Form (NSF). • However, there are times the contract may be subject to some conditions such as obtaining approvals from directors or shareholders, or licenses. • After drawing the sales form, 10 % of the deposit will be paid by the buyer and the buyer can appoint his own surveyor to inspect the ship.

36. Inspections stage • After the forming of contract, it will enter to the inspection stage. There are two major parts in the inspections stage which include the documents inspection and the physical inspection of the ship afloat. • For the document inspection, the buyer will check the ship's class records, certificate records. The inspection of records will reveal the history of ship's maintenance and compliance with the requirement of class. Furthermore, the buyer also should check the mortgagesrecords and the maritime lienrecords to prevent any damages or loss subject to the legal issue of the ship which occurred before the delivery of the ship. • For the physical inspection, it usually checks the surface of the ship and its logbook, unless others agreed.

37. Lien • The legal right of a creditor to sell the collateral property of a debtor who fails to meet the obligations of a loan contract. • A lien exists, for example, when an individual takes out an automobile loan. • The lien holder is the bank that grants the loan, and the lien is released when the loan is paid in full. • Another type of lien is a mechanic's lien, which can be attached to real property if the property owner fails to pay a contractor for services rendered. • If the debtor never pays, the property can be auctioned off to pay the lien holder.

38. Completion • The final stage of sale and purchase is known as completion stage. It involves pre-delivery matter including inspection of underwater parts by the classification society, delivery of documents and the physical delivery of the ship upon payment of the balance of the contract price. • Also this under water inspections can be done at the buyers request in which case if it is not required by the Classification Society's surveyor the due charges will be on buyers account. • For the Documents and Physical delivery, it usually occurs at different places which depending on the location of the ship. • The final inspection of underwater parts is located in dry-dock of the port of delivery. • To obtain the certificate of class in regards of the safety, a survey of the ship's bottom and underwater part is conducted by the surveyor of the classification society. It may be some recommendations for the repairing of ship which affect the expense of the seller before delivery. • Sometime, the buyer may appoint his own surveyor who approved by the classification society to carry out the underwater inspection while the ship is a float.

39. * For the final closing of transaction, the MOA specifies some necessary procedures. Some documents are required which include the closing memo, minutes of meeting of the seller's directors and shareholders, a certificate of good standing, power of attorney, the bill of sale, certificate of class, any consents or licenses required by the government authority, a certificate by the registrar of the ship's registry permitting the sale. • Furthermore, the seller should arrange the deletion of his name from the registry and deletion of the existing flag, if the buyer wants to change the flag. Also, cancellation of the insurance cover, settlement of mortgage and repatriation of crew should also be readied by the seller. • When the seller is ready, an advance notice of delivery-Notice of Readiness will be serviced to the buyer and the buyer will arrange the payment of bunkers and stores on board and instruct his bank to make the payment on the actual delivery date.

40. Protection of buyer • There are some clauses under the sales Form protecting the interest of the buyer of ship. For example, the Clause 9 of Sale Form 1993 has provided some limited protection for the buyer. Under the clause 9, the “ seller has made the warrant that the vessel is free from all charters, encumbrances, mortgages and maritime liens or any other debts whatsoever at the time of delivery” . • The buyer can claim against the seller for all consequences of claims make against the vessel which have been incurred prior to the time of delivery. If the shipowner cannot settle down all the mortgages and other claim attached to the ship before the delivery, the buyer can discharge the purchase price to cover this part of claim. Normally, the buyer would also retain part of the payment for around six months as security for any other claims. * However, it is difficult for the buyer to terminate the contact even the vessel still have some encumbrances, mortgages or maritime liens at the time of delivery. Under the English law, the "warranty" is a contractual promise which is not the condition of the contract, so the innocent party can only entitle to claim for the damages but not terminate the contact if there is breach of warranty. Thus, it is difficult for the buyer to terminate the contract.

41. Procedure to terminate the contract • * To terminate the S & P contract, there are two main procedures and the buyer must follow these steps: • Firstly, the buyer should put a notice to inform the seller that there was an encumbrance aware and, • secondly, the buyer should seek clarification on seller's intention with regard to the encumbrance by specifically referring to Sellers’ obligations under clause 9 of Sale Form 1993. • After taking the above two steps and the seller is fail to remove all the encumbrance in time, the buyer will be entitle to terminate the contract

42. Remedies of seller * Under the Sale of Goods Act 1979 s.41, the seller entitles to exercise a possessory lien for the vessel until payment by the buyer. * Also, the seller also entitles to resell the vessel to the other buyer if the buyer fails to settle the payment in the time. * An unpaid seller may bring an action to recover the price where the purchaser has acquired the property in the ship but refuse or failed to pay the price

43. Remedies of Buyer • Under the Sale of Goods Act 1979 s.51, the buyer entitles to take action for non-delivery of ship and claim for damages. • For the delay of delivery, the buyer can claim for the different value of vessel if the price to buy the other vessel instant is different. • Also, the buyer can terminate the contract and claim for damages if the vessel is non-delivery after certain period.

44. Duties of the seller * The main duty of the seller is to deliver the ship in accordance with the terms, conditions and warranty of the contract. The time of delivery may or may not be an essential part of the contract. If the time is essential, the buyer can cancel the contract if delivery is not made by the stipulation. • The seller also has the obligation to avoid the misrepresentations. Although there is no general duty of disclosure and the buyer is free to investigate the ship, the seller should not induce the other party to enter the contract by making material representations which are not true. • Statements or assurances made during negotiations leading to a contract may be either "terms" which form the express terms of the contract or just the statements which do not intend to be part of the contract, but help to induce the contract. • Even the statement is untrue "Misrepresentation", it is difficult for the buyer to claim for remedies if this misrepresentation does not become a contractual term.

45. Duties of the buyer • The main duty of the buyer is paying the agreed purchase price of the vessel. • Normally, the time of payment is not the essential factor unless there is a related term in the contract. • The buyer must also accept delivery under the Sale of Good Act 1979, s27. • It is provided under section 227, the payment and delivery should be concurrent unless otherwise stipulated. • Of course, the buyer also has the obligations to prevent the misrepresentation during the negotiation stage.

46. Conclusion of S & P • It is concluded that S & P of ship is one of the most complicated procedure in the shipping industry and it is much more complicated comparing with new building contract of ship. • The S&P contract involves different kind of professional knowledge of ship and the bargaining skills. • Furthermore, due to the legal effect raised by the Maritime liens attach to the second hand ship, the buyer should further check the history and court writs to reduce the future loss from the purchasing ship. • Thus, with regards to the complicated issues of this market, professional shipbroker takes an important role during the transaction.

47. S & P Brokers – E.g. • Both dedicated and professional, our team of brokers specialise in all aspects of ship sale and purchase including: Dry Bulk Carriers, Tankers, Container Vessels, Gas Carriers, Reefers, Tugs and Barges. • Ship sale and purchase brokers are generally known as intermediaries between Shipowners however at Ocean Shipbrokers we pride ourselves on our level of market knowledge to offer our clients an excellent service combined with up to the minute information. • We are also pleased to offer services in sale and lease back/project business helping to offer fixed calculable income returns over a set period of time. • * Clients include substantial government owned corporations, Stock Listed companies and Private individuals and should you require any further information about how Ocean Shipbrokers could represent your company then please contact one of our specialist brokers.

48. Ship broking * is a financial service, which forms part of the global shipping industry. Shipbrokers are specialist intermediaries/negotiators (i.e. brokers) between shipowners and charterers who use ships to transport cargo, or between buyers and sellers of ships. * Some brokerage firms have developed into large companies, incorporating departments specialising in various sectors, e.g. Dry Cargo Chartering, Tanker Chartering, Container Chartering, Sale & Purchase, Demolition and Research. Other "boutique" companies concentrate on specific sectors of the shipping market. • The principal shipping and shipbroking centres are London, New York and Singapore. Tokyohas a longstanding tradition in shipping/shipbroking, which is now more focussed on Japanese domestic trade.

49. Ship broking Other places continue to develop in international shipping services, such as: Hong Kong, Shanghai, Delhi and Mumbai; Copenhagen, Geneva, Genoa, Hamburg, Oslo, Paris and Piraeus in Europe; and in North America, Connecticut, Houston and Montreal are important shipbroking centres. * Until recently, it was commonplace for shipbrokers to cover more than one discipline, although nowadays the vast majority of shipbrokers specialise. The Institute of CharteredShipbrokers sets educational standards throughout the industry, Fellowship of which is considered a great honour.

50. Shipbroking can be categorised as follows: 1 Sale and purchase 2 Dry cargo broking 3 Tanker broking 4 Container broking