Sale of a ship will involve a capital expenditure generally running into millions of dollars. There are three (3) distinct sectors of the sale and purchase (S&P) market:
- New Buildings
- Demolition (Scrapping)
Secondhand ship market is the most active market. It is really rare for a ship to stay with the same owner from shipyard to scrapyard.
A ship might have an active life of 20 -25 years depending on the freight market. During the ship’s active life of 20 -25 years, the requirements of a ship operator can vary considerably. Thus, any shipowner is at some time might be a buyer or a seller in sale and purchase (S&P) market.
Selling a ship may be motivated by the need to dispose of ships made redundant by changing patterns of trade, or ships becoming obsolescent in a particular shipowner’s fleet and needing to be sold to make way for more modern additions.
When a ship becomes too old to keep in a trading condition economically and the only course left is to sell for demolition (scrap). Unfortunately, age is not always the reason for scrapping. For example, during the oil crises of the late 1970s and 1980s, many new ships were sold for demolition (scrapping). Prior to 1970s and 1980s shipping crises, there seemed to be no limit to the demand for crude oil carriers and every shipyard which could build VLCCs/ULCCs had full berths and order books.
During the shipping recession period, there was an inevitable massive reduction in the demand for oil resulting in some tankers going straight from the shipyard’s slipway to a lay-up berth. In such shipping crises, many shipowners could find no prospect of trade for their ships and no funds to pay for mothballing (put into long-term storage) ships so that demolition (scrapping) was the only course left. In some cases, it is usual for a shipowner to sell an obsolescent ship for demolition (scrapping) even though there may be secondhand buyers at a better price wanting the ship for trading. There are two (2) reasons for such apparently paradoxical behavior:
- Under some fiscal regimes, obtaining a high price for a ship near the end of active life may actually be disadvantageous from a taxation point of view
- Ship may be sold for further trading would mean there would now be two ships where there used to be only one. Ships naturally tend to be suitable for particular trades and so there is the risk that the seller would be creating problems for himself by providing a competitor with a ship with very low capital cost to amortize. New shipowner may be trading under a flag of convenience so that selling the redundant ship for further trading could risk increasing the amount of competition against the newly acquired ship