Case 7

Topics: Supply and demand, Net present value, Tax Pages: 5 (1317 words) Published: June 8, 2014
1. Assess the demand and supply of the capesize dry bulk industry. What do you expect to happen to demand relative to supply over the next four or five years? Please thoroughly explain and justify. What do you expect to happen to prices over both the short-run and the long-run? According to Ocean Carriers, supply and demand of capesizes determined daily hire rates. The demand and supply of capesizes was largely determined by the amount of shipping capacity needed in areas around the world. When market demand for shipping capacity was high, the demand for capesizes increased and owners would try to keep the vessels in operation as long as possible. The opposite was true whenever shipping capacity around the world decreased. The supply of capesizes was also affected by shipping capacities. As capesizes increased in size and efficiency, less and less vessels were needed to haul cargo. As a result, the demand for dry bulk capesizes was mostly a product of the world economy. When the economic atmosphere was healthy, the demand for these capsizes increased. Trade patterns also help to determine the demand expected of dry bulk capesizes. In the next four to five years, we expect that the demand to be significantly higher than the supply of dry bulk capesizes. The case states that Australia and India will increase their roles in the iron ore industry, which gives one an optimistic view on the future demand of capesize vessels. The production of iron ore in Australia is expected to increase; and the export of iron ore from India is also supposed to rise. This new possibilities for expansion should increase the demand of Ocean Carriers’ dry bulk capesizes and increase the amount of trading volume done by the company around the world. As for supply, the increase in technologies and manufacturing concerning capesizes will surely reduce the number of new vessels that need to be built each year. With the capesize fleet mostly under ten years of age, we do not expect Ocean Carriers to have the need to build more vessels, which should reduce their capesize supply over the next four to five years. In the short-run, we believe that prices for capesize delivery would remain relatively stagnant in the next one to two years. The case describes that imports of iron ore and coal are projected to level off in the short-run. It is because of this that we believe that prices will not increase by much during this period of time. In the long-run however, we think that prices for capesize delivery should increase. Eventually countries like Australia and India will begin to export iron ore around the world, which should significantly increase the amount of delivery demanded by dry bulk capesizes. With less supply of these vessels, Ocean Carriers could charge higher prices for companies to rent their capesizes. The higher projected trading volume in the long-run should help increase prices for the company. 2. What is the present value cost of a new capesize vessel that is being considered by Ocean Carriers? After taking into several factors such as operating costs, depreciation, and taxes into account, among others, we found the present value cost of a new capesize vessel being considered to be $3,806,704. This present value cost was calculated by taking the $39 million purchase cost of Ocean Carriers’ new 180,000 deadweight ton vessel to be produced in 2003 and dividing by a discount rate of 9%. Because the capesize vessel has the possibility of being used for 27 event years, we had to factor in this time value to determine the present value of a new capesize vessel. Analyzing this data allows up to realize what a new capesize vessel would be presently worth to Ocean Carriers. 3. In real terms, what do you expect to happen to average daily hire rates based on long-term forecasts of worldwide vessel shipments of iron ore? Explain. The worldwide demand for iron ore and coal makes up about 85% of the cargo that is carried by...
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