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Ocean Carriers Case

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by

Steven Cardadeiro

on 5 March 2013

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Transcript of Ocean Carriers Case

Ocean Carriers Case Study Do you expect daily spot rates to increase or decrease next year? What factors drive these rates? What factors drive average daily hire rates? Should Ms. Linn purchase the $39M capesize? Make two different assumptions. First, assume that Ocean Carriers is a US firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong. What do you think of the company’s policy of not operating ships over 15 years old? Iron ore imports as well as coal imports will most likely remain low
The positive correlation between imports and expected demand for capsizes indicates that the demand for capsizes will decrease.
63 new vessels scheduled for delivery in 2001 - with imports of iron and coal remaining stagnant over the next two years, we can anticipate that the spot rates will fall in 2001 and 2002.
Market surplus - lowers the price since suppliers need to compete for the limited demand.
This is also supported by some of the historical data from 1995 – 1999, where there seems to be a direct relationship between average daily rates and number of shipments. When the shipment levels remained stagnant, the spot rate decreased over time.
But there is hope – as Ms. Linn points out, Australian and Indian ore exports are expected to begin in 2003, indicating a rise in trade volumes and a rise in price because new vessels would be needed to transport these higher volumes, which would boost prices. Daily hire rate is determined by supply and demand.
Supply was determined by the number of vessels in service the previous year plus any new ships delivered minus and scrappings or sinkings.
Supply was affected by the increase in size and efficiency that the new ships offered – as they became bigger, faster and more fuel efficient, fewer ships were needed to carry the same amount of cargo.
As for demand, when the demand for shipping capacity was high, owners would keep a vessel in operation longer; on the other hand, when demand was low, scrapping rose. In a tax environment, Ms. Linn should not purchase the $39M capesize due to the largely negative NPV.
In the tax-free environment, NPV is positive – if this was the case, she should purchase the $39M capsize. (See results) The reason for this policy is to protect against uncertainty – it is very conservative.
Due to this restrictive policy, the company is not able to take advantage of ROI in the later years of the vessel - not a good investment policy.
Although NPV is negative for both the 15-year and 25-year operations with tax, it is less negative over 25 years
Indicates that there is greater benefit to operating the ship for a longer period. By Sarkis Agopcan, Steven Cardadeiro,
Justin Joyce, Iryna Mudra,
Venkat Subbarayan
Full transcript