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Ocean Carriers Case Analysis
Transcript of Ocean Carriers Case Analysis
Do you expect daily spot hire rates to increase or decrease next year (in 2001)?
What factors drive average daily hire rates?
How would you characterize the long-term prospects of the capesize dry bulk industry?
1. Number of vessels
2. Demand for shipping
3. Vessel efficiency
4. Age of vessels
5. Economic conditions
6. Trade patterns
Ocean Carriers, Inc. is an international shipping company with offices in Hong Kong and New York.
What do you think of the company's policy of not operating ships over 15 years old?
Ocean Carriers should not purchase $39M capsize
because the NPV is negative under both assumptions (with tax and without tax)
The company should operate
for 25 years!
NPV is positive when
the vessel operates for 25 years
in Hong Kong. (no tax)
In January 2001, Mary Linn, Vice President of Finance for Ocean Carriers, had to decide whether to accept an offered leasing contract for the duration of three years. However, the company does not currently have any capesize carriers in their fleet that meets the customer's requirements.
The duration of the leasing contract is quite short, so the company has to analyze whether the investment in a new capesize carrier will prove to be profitable.
The company operates and owns capesize dry bulk carriers, which are used to transport iron ore and coal worldwide.
The business operation is based on time - either chartering the vessels on a "time charter" basis or sometimes using a "spot charter."
Daily spot hire rates are
expected to decline in year 2001
India's iron ore production is expected to take off in the next few years
Australia's production of iron ore is expected to be strong
Demand for capesizes will increase because of the higher trading volumes, which will boost prices
First, assume that Ocean Carriers is a U.S. 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?
Should Ms. Linn purchase the $39M capsize? Make 2 different assumptions.
NPV after 15 years
Examine supply & demand
63 new vessels expected to be delivered, increasing supply
Anticipation that iron ore and coal will remain stagnant over the next two years (imports create demand)
If demand increases, the price will increase. Here, demand remains stagnant, so there will be no significant change in the price