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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 $! M capsize?－ "ustralian production in ore e#pected to be strong

－ ndian iron ore e#pected to take off in the ne#t few years

－ n %&&' "ustralian and ndian ore e#ports begin' new supplies increase trading (olumes

－ )emand for capesizes increase because of the higher trading (olumes' boosting prices.*ackground- +cean ,arriers is known as a shipping company who owns and operates capsize carrier thatcarries dry bulk around the globe

- t mainly transports iron ore and coal

- ,ustomers charter the ship by paying the daily hire rate)o you e#pect daily spot hire rates to increase or decrease ne#t year?- )aily hire rate determined by supply and demand of shipping capacity- #hibit % % millions of deadweight tons are o(er %/ years old and they will be scrapped- )ecrease because of the a(ailability of the capsizes0hat factors dri(e a(erage daily hire rates?- Market supply and demand

- Supply fleet size' numbers of scapped (essels' number of new (essels

- )emand ron ore (essel 1 coal shipment' world economy' trade patterns－ -year charter rate changed more than the iron ore (essel shipments' while the spot ratesfluctuate more widely than -year charter rates.- 0e ha(e decided that Ms. Linn should make this purchase if it is assumed that they are locatedin Hong 2ong and operating with no corporate ta# and the pro3ect life is %4 years.

- 567 was found to be $%'!84'888.%& which should be accepted because its positi(e.

- +n the other hand Ms. Linn should not make this purchase if +cean ,arriers were operating in9he :S and would be sub3ected to 4; ta#ation

- 0e found that net present (alue was-$4'4<'%&/.8& which should be re3ected because it=s negati(e in this case.0hat do you think of the company>s policy of not operating ships o(er 4 years old?- +ceans ,arriers will incur a net loss on the in(estment with this policy of selling at market(alue after 4 years.

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- @egardless of whether operations are based in the :S or Hong 2ong

- n general this is a bad policy."ssumption

+cean ,arriers was a :S firm and needed to pay 4; ta#es6roblemn early beginning of %&&' +cean ,arriers> ships could not meet the demand of charter "ssumption %,ompany was based in Hong 2ong and e#empted from ta#ation on profits#hibit%' worldwide fleet of capesizes was (ery young' less scapping in the ne#t years.#hibit' number of new (essels is going down' supply increase slowly' daily hire rate e#pectedto rise.

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Background

Problem

Question #1

Do you expect daily spot hire rates to increase or decrease next year (2001)

!ns"er #1

Daily spot hires are expected to decline in year 2001xamine supply and demand

$% ne" &essels expected to be deli&ered' increasing supply

!ssumption that iron ore and coal "ill remain stagnant o&er the next t"o years

(imports increase demand)

demand increases' the price "ill increase* +ere' demand remains stagnant' so

there "ill be no signi,cant change in the price

Question #2

-hich actors dri&e a&erage daily hire rates

!ns"er #2

.umber o &essels' demand or shipping' &essel e/ciency' age o &essels' economic

conditions' trade patterns

1* .umber o &essels

2* Demand or shipping

%* essel e/ciency

* !ge o &essels

* conomic conditions

$* 3rade patterns

Question #%

+o" "ould you characteri4e the long5term prospects o the capesi4e dry bulk

industry

!ns"er #%

67ptimistic8

ndia9s iron ore production is expected to take o: in the next e" years

!ustralia9s production o iron ore is expected to be strong

Demand or capesi4es "ill increase because o the higher trading &olumes' "hich

"ill boost prices

Question #

;hould <s* =inn purchase the >%?< capsi4e <ake 2 di:erent assumptions*

@irst' assume that 7cean Aarriers is a *;* ,rm subCect to % taxation*

;econd' assume that 7cean Aarriers is located in +ong Eong' "here o"ners o +ong

Eong ships are not reFuired to pay any tax on pro,ts made o&erseas and are also

exempted rom paying any tax on pro,t made on cargo uplited rom +ong Eong

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!ns"er #

7cean Aarriers should not purchase >%?< capsi4e

because the .P is negati&e under both assumptions ("ith tax and "ithout tax)

 Gears operating 1' P (3ax) 5>$'?H'?%I' P (.o tax) 5>1'22'?1$

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Question #

-hat do you think o the company9s policy o not operating ships o&er 1 years old

!ns"er #

 3he company should operate

or 2 yearsJ

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.P is positi&e "hen

the &essel operates or 2 years

in +ong Eong* (no tax)

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7cean Aarriers' nc* is an international shipping company "ith o/ces in +ong Eong

and .e" Gork*

ㅜㅖㅠ 

ㅑㄴ 

ㅇ

n Kanuary 2001' <ary =inn' ice President o @inance or 7cean Aarriers' had todecide "hether to accept an o:ered leasing contract or the duration o three years*

+o"e&er' the company does not currently ha&e any capesi4e carriers in their Leet

that meets the customer9s reFuirements*

 3he duration o the leasing contract is Fuite short' so the company has to analy4e

"hether the in&estment in a ne" capesi4e carrier "ill pro&e to be pro,table*

 3he company operates and o"ns capesi4e dry bulk carriers' "hich are used to

transport iron ore and coal "orld"ide*

 3he business operation is based on time 5 either chartering the &essels on a Mtime

charterM basis or sometimes using a Mspot charter*M

Daily spot hire rates are

expected to decline in year 2001

M7ptimisticM

.P ater 1 years

xamine supply N demand

$% ne" &essels expected to be deli&ered' increasing supply!nticipation that iron ore and coal "ill remain stagnant o&er the next t"o years

(imports create demand)

demand increases' the price "ill increase* +ere' demand remains stagnant' so

there "ill be no signi,cant change in the price