The Role of Newbuilding Broker

Information can be gathered from different sources in the industry. The broker should be well connected to the different players in the industry (e.g. ship operators, tramp owners and building facilities) to obtain relevant market information from first hand sources and to be up to date. These players are typically spread across various countries and continents. There are also other sources which are available to the shipping community such as shipping papers, websites and magazines (e.g. Lloyd’s List, Tradewinds, Fairplay et al.) and the data bases of the larger ship broking houses (e.g. Clarksons et al.) which keep good track record of the relevant developments. Most of the ship broking companies also publish weekly and monthly reports where they report recent newbuilding activities and certain trends in the market. The broker needs to be up to date and well informed at all times.

For a specific newbuilding project, the following information should be well assessed before choosing or approaching a specific ship builder.

There are several types of owners around the world, located in various countries around the globe and being influenced by different cultures, jurisdictions and tax environments. Each of them has a different background. A shipbroker should be well aware of these cultural differences and able to successfully manage them and guide other parties wherever necessary. People see, interpret and evaluate the vast amount of available information in different ways. What is considered and appropriate behavior in one culture is frequently inappropriate in another one. Misunderstandings arise when we use our meanings to make sense of others’ reality.

However, one can generally divide owners in to two groups:

It is useful to understand and to know the trading patterns of the operating owners, to assess the future demand of tonnage. It enables the broker to make assumptions and predictions, to guide clients and to be involved in their decision making process.

There are clients trading from Europe to Latin America requiring slower vessels with high intake and an extensive reefer capacity. Others are trading in the Baltic Sea requiring highest ice class. In addition, they will have to think about new propulsion systems, due to new regulations coming in to force. Therefore, such knowledge will also prove to be useful to select a suitable shipbuilding facility in line with owner’s requirements.

Owners have different motivation to order newbuildings. It is predominantly determined by their background, available finance or equity sources and their assessment of the future market outlook, including employment opportunities for their vessels.

Sometimes operating owners like to lease¹ or charter in new tonnage from tramp owners up to a certain percentage of their overall operating fleet on a long term or short term basis, to increase the size of their total fleet without equity input from their shareholders. Such commitments often do not appear on their balance sheet, which leaves them some more room for alternative investments. It also offers them some sort of comfort and security during difficult times where they can simply redeliver excessive tonnage to the tramp owners without having to operate the vessels at a loss or in the worst case to be forced to leave them idle. Tramp owners in return benefit from more attractive finance terms, enabling them to add additional tonnage to their owned fleet and making use of the economies of scale. Naturally there are always two sides of the coin, whereas the owner may not participate in market peaks where he has fixed his vessels at a lower rate over a longer period of time or might not be able to gain from the asset play where the charter contract is not transferable to a new Buyer and the charterer might be caught with an excessive rate at the bottom of the market where he is hit by significant losses.

There are other ship owners that see future potential in a specific ship type or market segment. There may be several reasons for their assumptions such as the age profile, new technological inventions, rules and regulations where existing vessels might become inferior or obsolete, a positive future outlook for a specific ship type and trade or very low shipbuilding prices that occur at the bottom of the shipping cycle. Therefore, some ship owners place an order on a speculative basis at their own risk, without relating their order to a charter contract or serious discussions with an end user. The broker should participate in the above mentioned decision making process, trying to assist his client to derive the right conclusions for his future investment and to give valuable advice wherever he can. Of course, no one possesses a crystal ball to foresee the future but information gathering and profound knowledge can lay a solid foundation to facilitate this decision making process. The broker often serves as sparring partner for the owner in the decision-making process.

One of the most significant tasks of a newbuilding broker is to locate a suitable shipyard according to the requirements of the owner. Not every yard can build every ship type due to lack of knowledge, experience or capacity.

The majority of the world’s shipbuilding capacity is located in Korea, China and Japan (Fig. 20.2). However, there are also yards which are located in Vietnam, the Philippines, Europe, Turkey, India and many other countries in the world. However, not all services are provided in all countries and by all yards. Consider the following anecdote: a broker in early 2007, had a newbuilding project for a ship owner who trades in the Baltic with chemicals. The intention of the owner was to build a series of chemical tankers with highest ice class and the tanks had to be built out of solid stainless steel, to be able to carry high-grade chemicals. The broker contacted the major reputable shipbuilders in Asia with this promising newbuilding project but to his surprise, none of these yards was interested in a four vessel newbuilding order. The tankers were too small and too sophisticated. The broker discovered that some of these big ship yards had never built ice classed vessels before and moreover had no experience in the treatment and fabrication of stainless steel that requires special storage and workmanship. Along the way, this young broker realized that from thousand of ship yards over the world only three to four smaller and very sophisticated ship builders had enough experience and the facilities to do the job. By the time he had put one and one together, he had already lost this project to one of his competitors.

Outside and inside dynamics have a significant impact on the ship builders. As outlined before, the shipbuilding industry is very volatile and naturally also the yards have to cope with constant changes. The newbuilding broker has to be aware of the shipbuilder’s current status under the prevailing market circumstances, to advise the owner correctly. The following anecdote reveals the critical input of a broker towards safeguarding the interests of his principal.

Ship yards are enormous facilities that construct heavy industrial products. These facilities require the acquisition of land located at the sea or larger rivers and the construction of the shipbuilding facilities, dry docks, slip ways, heavy cranes, paint shops, etc. To construct a vessel, the builders have to purchase large amounts of steel and equipment. These operations are also very labor intensive. For example, the world’s biggest ship builder Hyundai Heavy Industries in Korea employs 48,000 workers at their main yard in Ulsan alone. All these employees want to have their pay check at the end of the month.

Therefore, every shipyard has significant financial risks, which it has to manage throughout the very volatile shipping markets. This is an extremely difficult task and we have highest respect for those ship builders, which have managed to survive and to be successful throughout decades.

Because a ship owner places a significant amount of money to construct a vessel, the newbuilding broker should be in the position to accurately guide the owner in every respect, to prevent him from a loss. Of course, such losses can always be prevented through waterproof independent guarantees but a ship owner commits important financial resources to receive a ship in the end and not to have to deal with unreliable ship builders and having to claim back his investment through the guarantees with the banks.

Once the initial phase of scanning the market and matching the newbuilding project with an appropriate yard, the serious deal-making phase begins. In jargon of brokers, the Letter of Intent (LoI) is considered as the beginning of the “engagement stage”. One may lay fingers on the “bride” but he is not fully committed and bound to her. However, with an engagement one will have a strong moral commitment to someone and has laid a strong and solid foundation.