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THE CHOICE BETWEEN PURCHASE OF A NEWLY BUILT AND A SECOND HAND VESSEL Essay Example

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    Other
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  • Level:
    Masters
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The decision as to whether to purchase a newly built freight ship or to alternatively buy a second hand vessel is one that requires consideration of several underlying factors. However, circumstances in the shipping industry are such that a second hand ship purchase would prove more beneficial for a shipper than a new built ship purchase. Some of these pertinent issues are as follows:

In normal circumstances it is expected that new products are highly priced as compared to used or second hand goods which tend to be less priced by a small or large margin. Hence the cost of acquiring a newly built ship in comparison to the cost of purchasing a second hand one is such that the latter is economical. According to Beenstock and Vergottis (1989, p. 268) the prices of a new built vessel is such that it is directly proportional to the price of a second hand vessel. Thus, the more expensive a second hand vessel is it is expected that a new ship would even attract a much higher price.

Secondly, due to the economic factors related with time charters; banks are adamant to lend huge amounts to the shipping industry as it takes very long periods of time in voyages before there are returns realised from the industry (Beenstock and Vergottis, 1989, p. 266). Hence, for credit purposes it would prove easier to secure a loan from financial institutes with intent to purchase a second hand vessel as compared to the colossal amounts required for a new built vessel which bankers are hesitant to loan out.

Thirdly, the nature of sea trade is such that it is accustomed to inelastic demand that involves long voyages. The duration that it takes to ship goods from port to port would be expected to be predictable. And so, the procedure entailed in acquiring a new ship visa-vis purchasing a second hand vessel would be such that the later would easily deliver the cargo in good time while the former due to delays related to procedural protocols may not meet the deadline (Beenstock and Vergottis, 1989, pp. 263 – 264).

Moreover, a second hand ship is available for voyage immediately after purchase is made while on the other hand a new built ship requires time to undergo construction first (Beenstock and Vergottis, 1989). Therefore, for purposes of continuity of business it would prove advisable to purchase a second hand vessel that is ready for voyage immediately after acquisition as compared to a new built vessel that would require a period of time to undergo construction.

Generally, three major factors presented above inform the decision to purchase a second hand ship rather than a new built one. First, delays due to procedures related to acquisition of new built vessels are eliminated, secondly, it proves quite economical basing on financial resources such as loans and the cost of vessels. And lastly, a second hand vessel purchase would result in continuity of the shipping business as opposed to a newly built ship. All these factors put together suggest that a second hand vessel purchase is advantageous than a new built vessel as discussed.

Reference

Beenstock, M and Vergottis, A. (1989). An Econometric Model of the World Tanker Market.

Journal of Economics Transport and Policy. Volume XX111. No.3 pp. 263-280.