The Role of Newbuilding Broker

Fig. 20.1
Historical prices; newbuildings vs. secondhand handymaxes. Source: Clarksons’ Shipping Intelligence Network

The main goal of the newbuilding broker is to establish a shipbuilding contract between the shipbuilder and the ship owner. It is important to manage both parties’ expectations from the beginning so that a successful deal can be concluded. A broker should never underestimate the role of psychology within this process. It is crucial to understand that the broker is dealing with human beings that have their specific expectations. The role of the shipbroker is to identify them and to put oneself under the skin of these two parties to manage them throughout the process. These expectations are heavily determined by the nature of the company, their history, location, financial status and background but also by the current market environment. However, there are a few things that apply to every shipyard and ship owner. A ship owner no matter if he is a genuine ship owner or a financial investor aiming to build a cheap vessel of high quality with rich specifications to be able to operate the vessel at low cost over the vessel’s lifetime and to deliver quality to his clients.

An inexpensive vessel will enable the owner to generate a good return on investment and to successfully gain from peaks in the market. A shipbuilder aims to build the vessel at low costs and to timely deliver the vessel to his client with minimum defects. Therefore, a yard feels in boom-times of the shipping cycle typically more comfortable to repeat a standard type of vessel which they have built before, to diminish the costs of the design and being most quality, time and cost efficient in the overall production process.

20.1.1 Information Gathering

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.

20.1.2 Owners Background

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:

Financial Asset Player:

These are owners with a financial background, such as equity funds, stock listed companies, KG owners etc. These companies usually have a more project based approach and generate their profit through management and supervision fees one the one hand and possibly asset play on the other hand. The technical and commercial management of the vessels is very often outsourced to other shipping companies and service providers. In many cases, these owners are transparent companies, due to their legal nature. The broker can easily gain access to relevant information.

Traditional Owners:

These are mostly old established companies and often family run. Traditional owners tend to keep the commercial and technical management of the vessels under one roof. These companies tend to be very experienced and have seen and survived many difficulties of the shipping markets over the time. Some of them keep the vessels in their fleet during their lifetime of approximately 20–25 years and are therefore very focused on the technical specifications of a vessel and the overall quality. Traditional owners are very often privately run. The Owners try to run their companies very secretive for several reasons. This makes it less easy and often very difficult for a shipbroker to gather information. Every company has a reputation and leaves a trace over a certain period of time. Companies are known for their business behavior, performances and non performances and a shipbroker should be well aware, before recommending a shipping company to any third party.

20.1.3 Owners Trading Areas and Patterns

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.

20.1.4 Owners Motivation

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.

20.1.5 Yards Track Record and Background

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.


Fig. 20.2
Shipbuilding output in DWT per country. Source: Clarksons’ Shipping Intelligence Network

20.1.6 Yards Current Status and Conditions

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.

A Greek ship owner once visited a ship yard in China and was impressed by the modern state of the art facilities that he inspected. On top, the yard offered him a very attractive price. When he returned back home from his trip, he was determined to place this order. By coincidence, his newbuilding broker had a telephone conversation with another client who was building a series of smaller bulk carriers at the same ship yard. Due to its nature, a bulk carrier normally is a simpler vessel to build. Therefore, the broker asked the client about his experience and if he was satisfied with the yard’s performance. To his surprise, the owner was not satisfied at all with the performance. When the broker asked him for the reasons, he advised him that the majority of the experienced work force had left the shipyard and moved to other ship building facilities that offered them higher salaries. Thus, although the yard had very modern facilities and equipment, it was not able to build a quality vessel with timely delivery. Luckily, this order was never placed.

20.1.7 Yards Financial Status

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.

20.1.8 The Letter of Intent

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.

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