When a ship reaches the end of its working life it still has an inherent value for its scarp metal content. The principal markets for recycling are India, Bangladesh, Pakistan, China and Turkey to a lesser extent. The countries are active in the recycling market as they posses all the requirements to make it economically viable. Predominately they provide a cheap supply of labour and growing infrastructures in need of cheaper steel products. They also have the right costal geography which enables vessels to be sailed/beached at certain high tides.
The scrap price for vessels, like any other commodity, fluctuates with demand and supply. The demand for scrap is driven by around 300 recycling yards. The supply side of the market is driven by a combination of oil prices, freight/charter rates and aging profile of the vessel which will determine the viability of operating vessels of selling them for recycling.
The recycling market is actively supported by a large number of specialist ship brokers who issue “in-house” market reports and keep buyers and sellers aware of the current scrap steel price levels and who actively match buyers and sellers.
It is very rare for a shipbreaker/recycling yard to purchase a vessel directly from a ship owner, as due to the nature of their business, the scarp yards usually wish to pay for vessels on a deferred payment terms under a letter of credit issues by their bankers, whereas the ship owner is required to be paid on a cash basis.
This impasse is resolved by trading companies (“cash buyers”) which stand between the ship owners and the recycling yards as principles in the transactions. The cash buyers pay the vessel owners cash for the vessels and are prepared to accept payment under letters of credit from the recycling yards.
There are two ways in which the purchase of vessels is effected by the cash buyer
In Delivered Basis the cash buyer agrees to purchase the vessel from a ship owner subject to the ship owner delivering the vessel to the recycling yards within a certain time and subject to certain conditions (ie. the condition and specification of the vessel, release of all mortgages and debts)
The risk, responsibility and the cost of delivering the vessel to the recycling yard is borne by the ship owner.
The agreement between the cash buyer and the ship owner to purchase the vessel is evidenced by a sale and purchase agreement called a Memorandum of Agreement (“MOA”).
The MOA contains details of the vessels specifications, the date by which the vessel must be delivered to the recycling yard and will require a deposit to be lodges to secure the sale.The amount of deposit varies between 10-30 per cent. The release of the deposit is conditional upon the ship owner complying with all conditions under the MOA.
The Cash Buyer will normally enter into a corresponding MOA with the ship breaker whom they intend to on-sell the vessel. Instead of a deposit the recycling yard will provide the cash buyer with a letter of credit from an acceptable bank.
If the vessel is not delivered by the ship owner to the scrap yard by the delivery date the cash buyer is entitled to demand repayment of their deposit and is not obliged to purchase the vessel. Similarly, if on inspection at the recycling yard the vessel specifications do not match the specifications contained in the MOA, the vessel owner will again be in default under the contract. In practice, however a price re negotiation will normally be agreed between the cash buyer and ship owner. Vessel descriptions under any contract are crucial to a successful closing.
If the ship owner delivers the vessel in accordance with the terms of the MOA, the cash buyer is obliged to pay the balance of the purchase price of the vessel and to release the deposit.
The payment and transaction method means basically what it says. The cash buyer pays the ship owner for a vessel at a price based on the condition of the vessel (“AS-IS”) at the point of sale (Where-is) ie the cash buyer pays for the vessel at it current location/last port of discharge
The cash buyer, at their own risk, responsibility and expense will then sail and deliver the vessel to the recycling yard against payment under a letter of crredit from the breaking yard.
Mideast Ship Trading FZE.,
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Mideast Shipping & Trading Ltd., London Office
Tel: 44(0) 1992-586319, Mob: 44(0) 7770-234293