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In brass, there are only a small number of shipyards available, but it seems in the canal phase this is reduced further. There is a specific rule that says a shipyard cannot be built at the places connected via a rail link, but i don't understand why.

If i have a city card, meaning i can build within that city, what is stopping me build a level 1 shipyard? It has no materials needed to be shipped, so why is this place any different to any other city on the map? Am i missing a specific rule somewhere?

This has been a rule that initially confused out group, until we played online and realised the correct usage (which the rules do backup).

My confusion is that the specific rule says something like

Hence the shipyard in the canal phase cannot be built at this location

And i don't understand the rational.

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[a level 1 shipyard] has no materials needed to be shipped

I believe you've got that part wrong: A shipyard does require coal (look at the brown square at the bottom-right corner of the tile), so a city must be connected to a source of coal through canals or rails before you can build a shipyard there. http://www.boardgamegeek.com/image/307212/brass

Barrow-in-Furness and Birkenhead may only have rail links (notice that there's no blue line) to the rest of the map, from where coal may come.

Therefore during the canal phase, the only possible shipyard location is Liverpool as you can build a canal link to Wiggan or other potential coal sources; but there is no such potential canal link out of Barrow-in-Furness or Birkenhead.

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That was my error. I was looking at the level 0 tile, and saw no materials needed. Thanks! –  Codemwnci Nov 24 '10 at 23:31
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