Assume that Ocean Carriers uses a 9% discount rate.
1) Do you expect daily spot hire rates to increase or decrease next year? (5 points)
2) What factors drive daily hire rates? (5 points)
3) How would you characterize the long-term prospects of the capesize dry bulk industry? (10 points)
4) Should Ms Linn purchase the $39M capsize? Make 2 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. (75 points)
5) What do you think of the company’s policy of not operating ships over 15 years old? (5 points) Solutions:
1) Daily spot hire rates should be determined by supply and demand. Supply: The number of ships available equaled the number of vessels in service the previous year plus any new ships delivered minus any scrappings and sinkings. Demand: The demand for dry bulk capesizes was determined by the world economy, especially its basic industries.
As shown in Exhibit 5, since over 85% of the cargo carried by capesizes was iron ore and coal, the amount of iron ore vessel shipments approximately reflects the demand for dry bulk capesizes. The amount of fleet size reflects the supply of capesizes.
As shown in Exhibit 3, the number of new ships delivered in 2001 is 63. Since there had been very few scrappings in recent years, and most of the capacity of the worldwide fleet of capesizes was fairly young, we can assume that the change of fleet size during 2001 mainly comes from these new ships. Similarly, we can expect the fleet size in 2002 will be: 612+(612-552)*(33/63) ≈ 643
From Exhibit 6, according to the forecast of the consulting group, iron ore vessel shipments will be 445 millions of tons in 2002. We can compute the growth rates of supply and demand in 2002. | 2000| 2001E| 2002E| Growth rate|
Iron ore vessel shipments| 440| 436| 445| 2.06%|
Fleet size| 552| 612| 643| 5.07%|
We can see from the table above that the supply will grow faster than the demand, so I expect daily spot hire rate to decrease next year. This can also be explained according to the Linn’s analysis. With Australian production in iron ore expected to be strong and Indian iron ore exports expected to take off in the next few years, Linn took an optimistic view of the long-term market demand for capesizes. However, she also considered that imports of iron ore and coal would probably remain stagnant over the next two years while supply increases. We can reasonably anticipate that spot rates would fall in 2001 and 2002.
2) As mentioned in 1), daily spot hire rates are determined by supply and demand. Demand: As illustrated in the case, the demand for dry bulk capesizes was determined by the world economy, especially its basic industries. Over 85% of the cargo carried by capesizes was iron ore and coal. Production and demand for these products increased in a strong economy. Changes in trade patterns also affected the demand for capesizes. Supply: The number of ships available equaled the number of vessels in service the previous year plus any new ships delivered minus any scrappings and sinkings. Ocean carriers decided to deliver new ships or scrap old ships mainly based on the demand. Supply was also affected by the increases in size and efficiency the newer ships offered. Moreover, ages of ships affected the company’s scrap decisions and older ships receiver lower daily hire rates. In summary, the world economy, changes in trade patterns, the increases in size and efficiency of new ships (technology) and ages of ships drive daily hire rates.
3) As illustrated in the case, with Australian production in iron ore expected to be strong and...