Where Ships Come From?

By Basil M Karatzas and Tom Roberts, Compass Maritime Services

“If you want to build a ship, don’t drum up the men to gather wood, divide the
work and give orders. Instead, teach them to yearn for the vast and endless sea.”
–Antoine de Saint-Exupéry

A few decades ago, a maritime history book was written with the title: “Where Ships are Born; Sunderland 1346-1946” describing the prowess of the British shipbuilding industry when ships were made of British oak and forests were the limiting factor of shipbuilding.  These were the times when a vessel like the HMS Victory, Nelson’s flagship at Trafalgar, took 100 acres of timberland or 6,000 oak trees to be built; these were the times when vessels built in the US at the time of the American Revolution were considered of inferior in quality, although they did cost a lot less than a vessel built in Great Britain!  Yes, these were times when American-built vessels were ‘cheap’!
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The Milk Maids of Commerce

Donald Frost, Editor, Connecticut Maritime Association Newsletter

When the owner of our 1985 built MR went shopping for debt finance, bankers would have already seen a string of non-performing ship loans and an increasing likelihood of many more. They were generally fearful of lending to anyone other than those with whom they had long-term relationships, and even then the banks were fairly selective. Interest rates and equity levels from borrowers were higher than seen in the previous decades and even ships that had charters upon their delivery might not have long enough charter periods to secure the loan.
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The Progeny of a Single Tanker

By Jerry Lichtblau, MJLF & Associates, Inc.

Because of the nature of international trade, a tanker or any other vehicle of commerce can be said to have massive impact on the environment around it. Its reach, simply stated, is far reaching. However, even if we limit the scope of our purview to the financial, its impact is still highly significant. Let us take a simple product carrier built 25 years ago and assess what we have.

An MR delivered in 1985 likely delivered at a cost of about $18.5 million1, but through the end of 2010 has earned about $210 to $225 million in freight and a residual scrap value. A flow chart of how this freight has been utilized is shown below. The revenue assumption is basis an average daily return (T.C.E.) of 5 benchmark MR routes2 from 1990 to present and, prior to that, a clean product average published in industry publications and two cost components that are removed from the gross freight to derive the daily return described in industry indices – a net revenue of over $125 mm. Bunker costs (≈ $35 – 40 mm) were estimated on basis bunker prices published by Worldscale from 1989 to present. Prior to this, the average ratio between WTI and Worldscale bunker prices was applied to WTI prices to estimate the price. In addition, a range of average MR voyage lengths (resulting in 26 to 37 voyages per year) was used to provide the range of bunker costs described. Port costs were estimated to be about $75k currently and were dis-inflated at a 2% p.a. rate to derive costs for the period. The range of estimated costs is a function of the differing number of voyages per year described in the derivation of the bunker costs.
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Insurance – Contest of Aromas?

By Michael Northmore

Some say insurance is about the “Perfume of the premium overcoming the stench of the risk.” Others will refer to the fine gold thread still running through Marine Insurance of Uberrima Fides, or “Utmost good faith” (a quaint notion in some of today’s financial world?).  But I digress.  The gold thread to be addressed here is Premium. How about $20 million?

Marine Money said price a typical 25 year’s worth of insurance on a 1985 built, 40,000 DWT Product Tanker ordered in Japan; plus describe the complexity and enormity of the Marine insurance market, how it works, how accounts are handled and how business is won.  I’ll attempt to make the latter less dry by adding some history & perspective (plus apologize now for inflicting an anecdote and “maxim” or three upon Marine Money’s readers.)  Note: what follows is based on my experience, and memory, and so will differ from other’s.

Total insurance cost over 25 years?  I say “How about” $20 million because it depends on variables like the owner’s loss record, fleet attractiveness, deductibles, amounts insured (especially Loss of Hire daily indemnities) and the ship’s trade.  If trading to the U.S.A., add P&I Club pollution voyage surcharges (probably paid by the charterer).  If trading to “hot spots” like the Persian Gulf during the Iran/Iraq war, then add big war additional premiums (again, usually reimbursed by the charterer).  A spectacular, slightly earlier war additional premium example comes from the Vietnam war.  A ship valued $9 million, trading into South Vietnam, was insured by a single London War Risks underwriter at a whopping $3 million premium per voyage (she blew up on the fourth).
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It’s a matter of “Class”

By Robert Kunkel

We’re sure we will be battered by the feminists while describing the reasons why sailors label a ship a “she”. Some believe it is the beauty of her lines. Others the ability to turn her nose up in the middle of a storm while you plead “not now baby – please not now”. As Marine Money looks at the “cradle to grave” commercial and financial impact of a ship, we’re here to tell you the condition of the “she” and her level of beauty is a matter of “Class”.

Ships and women require maintenance; some more than others. In both cases, the higher maintenance ones seem to attract the most attention. That is until the maintenance is ignored. Where the attraction of tall, dark and handsome men may drive the maintenance costs on one of our subjects, Class societies keep the maintenance up on the other.
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The Banker’s Contribution

Editor’s Note:
When considering the life-cycle of a ship and the economic benefits that flow from it, one of the obvious beneficiaries is the banker. After all, when was the last time a ship was purchased without a loan? A friendly banker took on the challenge of providing the financier’s input into the overall economic multiplier derived from the vessel as well as the many touch points it has within a finance organization.

Since shipping is an inherently capital intensive and an international trade linked business, it follows that the banking sector is a big stakeholder in shipping, serving as a key source of asset and trade financing.

A 1985 built product tanker would have started its ‘life’ at a shipyard after the placing of an order by an owner.
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MT “Global Stimulus”

A Case Analysis with Special Emphasis on Maritime Employment

By Jens Alers, Managing Director, Bernhard Schulte Shipmanagement – Bermuda

If you want to create lasting economic stimulus, build a ship!

On first sight, the Governor of Kentucky appears to agree with that statement. The New York Times reported on December 6 that the Governor has promised generous tax incentives in support of plans to construct a full-size replica of Noah’s ark, complete with animals (“small, young giraffes”) and actors, and make it the centerpiece of a Bible-based tourist attraction called Ark Encounter. The theme park in Grant County, Ky., is expected to employ 900 people when it opens in 2014, or approximately 6004 years since creation, by the count of those inclined to find all answers to scientific questions in the Book of “Genesis”. Taking a creationist’s approach to job creation is a somewhat questionable concept, to say the least. Just to be clear: The Kentucky Ark is not envisaged to ever sail from its yard in the park, even with the best of hope for another deluge as a result of global warming or a seriously upset Maker. More importantly, tax subsidies for projects involving maritime assets have hardly ever been a suitable stimulus for a truly sustainable economic future. As they say in the shipping world: It won’t float!
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The Significance of Flag During A Ship’s Life

By Bill Gallagher, International Registries, Inc.

Shipping is like no other business I know. In what other industry can so many people of so many different backgrounds and interests come together to put their full faith and financial interests in one vessel that plys the seven seas? In my years as a Flag State Administrator, I’ve been amazed by how many different people from the varying industry sectors I would meet in a given year. Oftentimes, I found it rather curious how parochial some of the industry segments were. For instance, the lawyers may know the bankers or owners, but would be hard pressed to name important technical types from the class societies or port States. The obvious reason for this diversity of contacts for me is that all the major players in the maritime industry come together in the vessel registration process. Lawyers, owners, shipbuilders, charterers, class societies, ship managers, financiers, P&I all have a piece of the process. I think this diversity has had a profound effect on the flag State Administrations. Years ago, the registry model was long on the master, regulator and legal side as far as personnel were concerned. Now we find it expedient to have all the varying disciplines represented in our Administration. Within this new registry model, ship managers, crewing agents, regulators, and bankers, among others, have all found a home. That home itself used to be one centralized location in Reston, Virginia. Now it is 21 locations worldwide, which truly reflects the international nature of the shipping business.
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Sake and Sea Miles

By Matthew Flynn, Managing Director, Worldyards.com Pte Ltd

Why use US dollars to measure the economic impact of a product tanker built in Japan during the 1980s? That would be the equivalent of walking into the Stamford Mall and trying to pay at Starbucks with a 1000 yen note.  The real currency of Japanese shipbuilding is the sake that marks each and every milestone. After delivery, the sea miles that follow the ship’s first sailing will then be the best calibration of economic impact.

Sake is the measure of a newbuilding job well done and sea miles are the measure of a ship well built.
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Vessel Hypothetical – A Lawyer’s Perspective

By Eileen Brown, Thompson Coburn LLP

[It is 1985, a shipowner and broker decide, over drinks at the Four Seasons in New York, that the time is right to build a new vessel.]

After the euphoria of the evening wears off, the questions begin to swirl.  How do we choose the right yard?  Have we timed the market correctly?  Where will we get the money?

We haven’t heard too much about our owner’s business.  He has made a good deal of money in the United States – his business is buoyed by Uncle Sam.  His is one of the lucky companies that had successfully negotiated Operating Differential Subsidies (“ODS”) with the U.S. Maritime Administration.  The U.S. government is contractually obligated to provide these funds to the owner who happens to operate a fleet of primarily U.S. flag vessels in certain desirable liner trades.  In 1985, one of these contracts alone is worth up to $2 million per year per vessel.  Despite the collapse in the tanker trades, our owner is doing quite well.
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