Transcript of Ocean Carriers Case Study

Ocean Carriers Case Study

How would you characterize the long-term prospects of capsize-dry-bulk industry?
Should Ms. Linn purchase the $39 M capsize?
Australian production in ore expected to be strong
Indian iron ore expected to take off in the next few years
In 2003, Australian and Indian ore exports begin, new supplies increase trading volumes
Demand for capesizes increase because of the higher trading volumes, boosting prices.
Background
- Ocean Carriers is known as a shipping company who owns and operates capsize carrier that
carries dry bulk around the globe
- It mainly transports iron ore and coal
- Customers charter the ship by paying the daily hire rate
Do you expect daily spot hire rates to increase or decrease next year?
- Daily hire rate determined by supply and demand of shipping capacity
- Exhibit 2: 2 millions of deadweight tons are over 24 years old and they will be scrapped
- Decrease because of the availability of the capsizes
What factors drive average daily hire rates?
- Market supply and demand
- Supply: fleet size, numbers of scapped vessels, number of new vessels
- Demand: Iron ore vessel & coal shipment, world economy, trade patterns
3-year charter rate changed more than the iron ore vessel shipments, while the spot rates
fluctuate more widely than 3-year charter rates.
- We have decided that Ms. Linn should make this purchase if it is assumed that they are located
in Hong Kong and operating with no corporate tax and the project life is 25 years.
- NPV was found to be $2,975,777.20 which should be accepted because its positive.
- On the other hand Ms. Linn should not make this purchase if Ocean Carriers were operating in
The US and would be subjected to 35% taxation
- We found that net present value was
-$5,563,204.70 which should be rejected because it's negative in this case.
What do you think of the companys policy of not operating ships over 15 years old?
- Oceans Carriers will incur a net loss on the investment with this policy of selling at market
value after 15 years.

- Regardless of whether operations are based in the US or Hong Kong

- In general this is a bad policy.
Assumption 1
Ocean Carriers was a US firm and needed to pay 35% taxes
Problem
In early beginning of 2003, Ocean Carriers ships could not meet the demand of charter
Assumption 2
Company was based in Hong Kong and exempted from taxation on profits
Exhibit2, worldwide fleet of capesizes was very young, less scapping in the next years.
Exhibit3, number of new vessels is going down, supply increase slowly, daily hire rate expected
to rise.

Background
Problem
Question #1
Do you expect daily spot hire rates to increase or decrease next year (2001)?
Answer #1
Daily spot hires are expected to decline in year 2001
Examine supply and demand
63 new vessels expected to be delivered, increasing supply
Assumption that iron ore and coal will remain stagnant over the next two years
(imports increase demand)
If demand increases, the price will increase. Here, demand remains stagnant, so
there will be no significant change in the price
Question #2
Which factors drive average daily hire rates?
Answer #2
Number of vessels, demand for shipping, vessel efficiency, age of vessels, economic
conditions, trade patterns
1.
2.
3.
4.
5.
6.

Number of vessels
Demand for shipping
Vessel efficiency
Age of vessels
Economic conditions
Trade patterns

Question #3
How would you characterize the long-term prospects of the capesize dry bulk
industry?
Answer #3
Optimistic
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
Question #4
Should Ms. Linn purchase the $39M capsize? Make 2 different assumptions.
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?

Answer #4
Ocean Carriers should not purchase $39M capsize
because the NPV is negative under both assumptions (with tax and without tax)
Years operating 15, PV (Tax) -$6,984,937, PV (No tax) -$1,252,916

Question #5
What do you think of the company's policy of not operating ships over 15 years old?
Answer #5
The company should operate
for 25 years!

NPV is positive when

the vessel operates for 25 years
in Hong Kong. (no tax)

Ocean Carriers, Inc. is an international shipping company with offices in Hong Kong
and New York.

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
"Optimistic"

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