Ocean Carriers Case Analysis

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FI602 – Finance Strategy and Valuation

Case Analysis

Ocean Carriers

March 23, 2011

Executive Summary
Industry Overview

Capesize dry bulk carriers provide shipping services worldwide. Due to their size, Capesize carriers must sail around Cape Horn in order to travel between the Atlantic and Pacifica Oceans – the ships are too large to utilize the Panama Canal. In January 2001, there were 553 capesize vessels in service throughout the world.

Demand for dry bulk carriers is determined by the world economy. Over 85% of the capesize vessels are used for shipping iron ore and coal. In a strong economy, production and demand for iron ore and coal increases. In the next few years, Australian production of iron ore is expected to be strong and Indian iron ore exports are expected to grow. These sources of new iron ore supply will increase trading volumes and therefore demand for capesize ships is likely to increase.

There are 63 new vessels that are scheduled for delivery in 2001. Therefore, the supply of capesize vessels will increase substantially which may decrease the daily hire rate in the short term. However, considering a favorable forecast of Australian and Indian production, there is expected to be favorable demand for capesize vessel service in the long run.

Customers for capesize carriers charter the vessels for a specific time period. Customers determine what cargo is carried and control where the vessel is loaded and unloaded. Most carriers are charted on a “time charter” basis for period of one to five years. Occasionally, spot charters are negotiated due to market conditions. The customers, called the “charterer”, agree to pay a daily hire rate for the entire length of the contract. New ships generally earn a 15% premium in daily hire rates. Ships over 25 years old typically receive a 35% percent discount from the industry average.

Company Overview

Ocean Carriers Inc. owns and operates capesize dry bulk...
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