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NAME 457 Maritime Economics and Management Shipbuilding

Maritime Economics and Management: shipbuilding

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NAME 457 Maritime Economics and Management Shipbuilding

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  1. NAME 457 Ship Economics and Management Part – 4: Shipbuilding Economics and Management Cdre M Muzibur Rahman, (E), psc, PhD, BN Cdre Muzib, psc, PhD

  2. World Fleet by 2015 Number of Ships: 89,463 3,352 6,126 10,992 35,131 11,882 21,980 General Cargo Tanker Dry Bulk Passenger Container Other 39.27% 24.57% 13.28% 12.29% 6.85% 3.75% Cdre Muzib, psc, PhD

  3. Global Shipbuilding : World seaborne trade is rising Source: Shipping Review and Outlook Cdre Muzib, psc, PhD

  4. Shipbuilding Requirement for Fleet Age Replacement required: 109.6 + 59.2+ 82.8 = 251.6 million GT Cdre Muzib, psc, PhD

  5. Regional Shipbuilding Scope Because of high Chinese productivity, Intra-Asia container service growth is about 10.4% per year (highest in the world). So, demand of vessels for regional operation is also high. Europe-Asia 9.4% p.a. Trans-Pasific 7.2% p.a. Others 6.9% p.a. Intra-Asia 10.4% p.a. Highest in the world Cdre Muzib, psc, PhD

  6. Cdre Muzib, psc, PhD

  7. Shipping and Shipbuilding CYCLE … Cdre Muzib, psc, PhD

  8. Shipbuilding CYCLE ….. The shipbuilding industry is a cyclic industry. It is dependent upon the world economy and especially the fortunes of the shipping industry. This can be seen more clearly as freight rates fluctuate and maritime diminish - both have experienced drastic reductions in 2008 and 2009. This has had a strong impact on the industry. trades A B C A Flat Upturn Flat shipbuilding Decline Cdre Muzib, psc, PhD

  9. Cdre Muzib, psc, PhD

  10. Major Parties for Shipbuilding • Owner • Builder • Charterer • Insurance company • Flag States • Port States • IMO and related regulatory bodies • Classification Societies • Financial Institutions Cdre Muzib, psc, PhD

  11. Elements of Ship’s Life Cycle Cost • Raw Material cost • Machinery/Equipment cost • Design cost Initial cost • Classification Society cost • Fabrication /Assembly cost Life cycle cost • Registration cost • Operating cost • Maintenance cost • Salvage value Cdre Muzib, psc, PhD

  12. Investment in a ship of a given specification usually involves four main factors: (1) shipbuilding cost, (2) operating expenses in the trade, (3) cargo and passenger traffic volume, and (4) level of tariffs applicable to the traffic forecasts. Cdre Muzib, psc, PhD

  13. Cdre Muzib, psc, PhD

  14. Buyers’ Market Sellers’ Market • Low prices • Early delivery • Attractive financing terms • Proactive engineering • Yard flexibility • Buyers’ contract terms • High prices • Long delivery • Little or no yard financing • Sellers’ terms in contract • Inflexibility Cdre Muzib, psc, PhD

  15. Ship-owner Acquisition Process: • Analysis of the marine transportation market • Identification of a business opportunity • Study of the fleet of ship(s) required • Characterization of the ship (Concept Design) • Analysis of the possible alternatives: – Relocation of a ship from the existing Owner fleet – Freight of a ship – Acquisition of an existing ship (2nd hand) – Building a new ship • Selection of the Consultant/Designer • Development of the Preliminary Design Cdre Muzib, psc, PhD

  16. Commercial processes of the Ship-owner for new building: • Selection of the Yards • Request for a declaration of interest from the Yards • Send enquiries with request for quotation • Analysis of the proposals from the yards • Preparation of contract pro-forma • Negotiation • Discussion of the type of financing • Signature of the shipbuilding contract • Follow-up of the construction • Reception of the ship Cdre Muzib, psc, PhD

  17. Building Cost in European Shipyard Cdre Muzib, psc, PhD

  18. Shipbuilding Cost in Bangladesh Cdre Muzib, psc, PhD

  19. ALUMINUM HPB BUILT BY DEW FOR COAST GUARD Length OA Length OA 17 17. .47 47 m m. . Breadth (max) Breadth (max) 5 5. .51 51 m m. . Draught (moulded) Draught (moulded) 1 1. .40 40 m m. . Displacement Displacement 25 25 tonnes tonnes. . Cruising Speed Cruising Speed 20 20 knots knots. . Maximum Speed Maximum Speed 34 34 knots knots. . Mission Length Mission Length 350 350 Nm Nm. . Cost per vessel: Tk 14.6 crore How much for hull? Cdre Muzib, psc, PhD

  20. Costing of a FP Boat Description Cost (%) Design & Drawing Supervision Hull and Superstructure Machinery, System and fittings Navigation, Life Saving & Fire Fighting Insurance Spare parts and Miscellaneous Cost Total Cost 1.67 2.03 19.76 53.19 15.20 1.42 6.74 100 Cdre Muzib, psc, PhD

  21. COSTING OF A CARGO SHIP OF 1500 DWT Description Cost (%) 1.5 2.0 14.0 65.0 10.0 1.0 6.5 100.0 Design & Drawing Supervision Hull and Superstructure Machinery, System and fittings Navigation, Life Saving & Fire Fighting Insurance Spare parts and Miscellaneous Cost Total Cost Cdre Muzib, psc, PhD

  22. Shipbuilding Costs and Competitiveness The price competitiveness of a shipyard broadly depends on:  Material supply,  Facilities,  Skilled labor,  Wages,  Labor productivity,  Exchange rates, and  Subsidy Cdre Muzib, psc, PhD

  23. Factors in Selecting Yards for Invitation • Physical characteristics • Technical capabilities • Experience • Order book • Employment • Location • Ability to assist financing • Reputation • References Cdre Muzib, psc, PhD

  24. Request for Expression of Interest • Simple and brief inquiry. • Sent by e-mail or fax. • Saves time and effort. • Permits assessment of number of yards participating. Cdre Muzib, psc, PhD

  25. Invitation to Bid • Best process. • Make/create legal obligations. • Not to be used to develop price estimates. • Use standard formats. • Formality is required. • Use bid form. Cdre Muzib, psc, PhD

  26. Information to be Sent in Invitation to Bid • Brief description of vessel. • Name and address of person requesting proposal. • Number of vessels and options (if any). • Documents: Plans, Specifications, Pro-forma contract or Heads of Agreement. • Required delivery. • Requirement for cash price. • Currency. • Financing terms. • Confidentiality of owner’s documents. • Performance bond (if any). • Period of validity of bid. • Obligations on owner concerning bids. • Signature by authorized representative. Cdre Muzib, psc, PhD

  27. • Additional yard information - Quality information - Yard standard details - Current order book - Financial statement - Bank reference - Management plan - Technical plan - Major event schedule • Complete bid form Cdre Muzib, psc, PhD

  28. Tips in Bidding • Hold bidders’ conference. • Use agenda, if necessary. • Be firm on submittal date. • Create short list. • Be courteous and fair. • Ensure ethical practices. Cdre Muzib, psc, PhD

  29. Bid Analysis • Price for one vessel • Price for a multiple vessel order • Currency of payment • Additional cost for financing • Location of yard (and distance to where vessel or vessels will be deployed) • Cost of positioning vessel • Reputation, experience and quality of yard • Financial health of yard • Proposed building schedule • Owner’s costs as they relate to yard location (i.e. inspectors’ housing, travel, taxes, etc.). Cdre Muzib, psc, PhD

  30. Negotiations • Have primary bidder and two back-up bidders. • Beware of driving bidder below level of profitability. • Be well informed and prepared. • Be aware of legal obligations in negotiating stage. • Have at total and complete meeting of the minds. • Yard to take total responsibility for design. • Avoid split responsibilities. • Review, in detail, all documents and initial every page of: - Contract - Specifications - Drawings Cdre Muzib, psc, PhD

  31. Tips in Negotiating • Be fair. • Be patient. • Be firm, until it is absolutely necessary to be flexible. • Take enough time for the process. Cdre Muzib, psc, PhD

  32. McCormack’s Rules for Negotiating • Do not get stranded by “how much”. Money issues are only one part of the transaction. • Let the other party go first (with terms and numbers). • Play in majors. • Do not deal in round numbers. • Avoid showdowns. • Negotiate backwards. • Trade places. • Mollify then modify. • Deflect with a question. • Question positions but do not ignore them. Cdre Muzib, psc, PhD

  33. McCormack’s Rules for Negotiating (Cont’d.) • Improve the offer with other parties’ self interest. • Consider barter. • Keep your time frame quiet. • Step back and relax. • See emotional outbursts as opportunities. • Act in anger – never react in anger. • Give the other parties side victories. • Use candor. Cdre Muzib, psc, PhD

  34. Silbiger’s Rules for Negotiating • Know your opponent. • Know yourself. • Do your homework. • Understand your strategy. • Understand your limits. • Review your negotiations, afterwards. Cdre Muzib, psc, PhD

  35. Shipbuilding Is Governed By Many Laws • Contract law • Other laws: - tort - fraud - negligence - employment/labour - environmental - etc. Cdre Muzib, psc, PhD

  36. CONTRACTS Contract is a legal document, an agreement between two parties to do something. There are many types of contracts. The major two types are Cost Plus Fixed Fee and Fixed Price. Commercial ship contracts are usually fixed price. Even though there are many standard contracts they are usually customized during final negotiations. A cost-plus-fixed-fee contract is a cost-reimbursement contract that provides for payment to the contractor of a negotiated fee that is fixed at the inception of the contract. The fixed fee does not vary with actual cost, but may be adjusted as a result of changes in the work to be performed under the contract. Cdre Muzib, psc, PhD

  37. SPECIFICATIONS The Specification describes the technical and commercial requirements of the ship along with the Contract. Here, drawings are used as the control documents for further development of design, construction, testing and delivery of the ship. Two best known specifications are the US Navy's GEN SPECS and the old MarAd Standard Specifications. Cdre Muzib, psc, PhD

  38. Conditions for a Contract • An offer • An acceptance • Consideration • Intent to create a legal relationship • In writing (sometimes oral) • Parties are competent • Form required by law • Not impossible of performance • Not contravene law or public policy Cdre Muzib, psc, PhD

  39. An Offer Complete Free of ambiguities Properly communicated Fixed time of acceptance (or kept open for a reasonable time) May be revoked before acceptance. • • • • • An Acceptance Creates the binding contract Must be absolute and complete Qualified or conditional is NOT an acceptance (it is a counter offer). Silence is NOT an acceptance. • • • • A Contract May Be Void for : Material misrepresentations Fraud Duress Improper conduct • • • • Cdre Muzib, psc, PhD

  40. Contracting Why it can be complicated • International transaction • Different laws: - construction/building - provision of services - sale of goods • More than 2 parties • Much money • Obligation may occur early, during - bidding phase - negotiations • Constantly changing - laws - interpretations of law - tax regulations Cdre Muzib, psc, PhD

  41. Contracting • Written (usually) • Involves legal advice and assistance • Often starts with “Heads of Agreement” and a “pro forma” contract • Sometimes letter of understanding Cdre Muzib, psc, PhD

  42. Shipbuilding contracts Shipbuilding Contract (a sales contract) Builder/Seller Buyer/Purchaser (Shipyard) (Ship owning Company) Question : Just Builder & Buyer ? Cdre Muzib, psc, PhD

  43. Shipbuilding contracts Sales Contract Purchaser/ Buyer Contractor/ Seller Shipbuilding Contract Builder (Shipyard) Cdre Muzib, psc, PhD

  44. Shipbuilding contracts Purchaser/Buyer Charter Party Bareboat Charterer (Owner/Leasing Company) Shipbuilding Contract Builder (Shipyard) Cdre Muzib, psc, PhD

  45. Interested parties in addition to the Builder and the Buyer Among such parties you may find: – Contractors – Authorities – Insurance companies – Financial institutions – Charterers Cdre Muzib, psc, PhD

  46. Shipbuilding Contract • It is a legal document prepared by the technical staff of the contracting parties and the final version should be reviewed by lawyers. • It consists of a set of terms (clauses) and some enclosures. • The terms identify the contracting parties and define the conditions of the business transaction. • The enclosures: – Price and payment conditions – Compensation – Milestones – Specification – Drawings Cdre Muzib, psc, PhD

  47. Principal elements of a shipbuilding contract Cdre Muzib, psc, PhD

  48. Basic Elements of a Shipbuilding Contract • The parties • What is to be done • Price • Delivery • Guarantees • Tests • Change procedures • Right to reject • Default • Title • Jurisdiction Cdre Muzib, psc, PhD

  49. Shipbuilding contracts A few topics worth focusing on, apart from main dimensions and characteristics, speed, warranty of quality etc. : – Design responsibility – Buyer’s supplies – Contingency fund – Buyers representative – Security for instalments paid to the Builder by the Purchaser – Who is the Owner during the building period Cdre Muzib, psc, PhD

  50. Shipbuilding Contract • In most new buildings, conversions and repairs, it is the builder who issues the first draft of contract. • The Contract is generally based on a pro-forma document. The most common pro-forma for Shipbuilding Contracts are: – SAJ, Shipowners Association of Japan (1974) – Norwegian Associations of Shipowners and Shipbuilders (2000) – MARAD Standard Form (1980), Maritime Subsidy Board (MSB) of US Department of Commerce – BIMCO NEWBUILDCON, Baltic and International Maritime Council (2007) - AWES (1972), Association of West European Shipbuilders, currently designated CESA – Committee of European Shipyards’ Associations (2004) Cdre Muzib, psc, PhD

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