Ocean Carriers Corporate Finance

Case Study 1: Ocean Carriers   Corporate Finance 3.2

The following is an analysis of the worldwide capsize fleet and the expected movements of the market. We base our recommendations on these figures and discuss what is the best way to go about in the next few years.

In order to make a proper prediction of what the spot hire rates will do In the short term, we took a look at exhibits 2 and 3 from the case study E. Stafford, K. Luchs, A. Chao (2002) Ocean Carriers. The daily hire rate is determined by supply and demand of the shipping capacity. Exhibit 2 tells us that as of December 2000 there are relative few capsizes over 20 years old, so relatively few will be scrapped since there are a lot more young ships in the worldwide capsize fleet. The daily spot hire price will decrease in the short term because of the availability of capacity like we can also see in exhibit 3.

[pic 1]

[pic 2]

E. Stafford, K. Luchs, A. Chao (2002) Ocean Carriers. Harvard Business School

The factors that drive the average daily hire rates are the demand and supply mechanisms.
The demand side is mainly determined by the developments in the world economy, the production and demand of iron ore and coal will increase with a strong economy and the demand for capsize fleets will rise resulting in a higher daily hire rate.

At the supply side we look at the number of the new vessels (purchases), the amount of vessels scrapped or sunk, and the fleet sizes. The average age of capsize fleets also plays a part in the supply since newer ships tend to be bigger, faster and more fuel efficient. So that fewer ships are needed to carry the same amount of cargo. Newer ships will command a higher daily hire rate than older ships.

Changes in  trade patterns also affect the demand of capsize fleets, if the distance between exporter and importer increases the demand for capsize fleets will also increase and affect the daily hire rates.

The production of ore in Australia and India are expected to be strong and from 2003 the export of these production starts taking place. This leads to an increase of the trading volumes, thus an increase of demand for capsizes. So in the long term this increase of the demand will give the hire rates a big boost.
Because Ocean Carriers current fleet does not have sufficiently large capsizes available for the year 2003, new capsizes must be acquired.

If the firm headquarters are in the US, they are obligated to pay a tax rate of 35%. After calculating the NPV of this investment we do not recommend accepting the project. These are our results:

(All the calculation in the attached spreadsheet)

The length of the useful life is obviously a factor that has a big impact on the NPV. We think that if the useful life was bigger than 15years the NPV would be positive, or better said bigger than the NPV with a useful life of 15 years.

However if the firm is based in Hong Kong (without tax rate), the NPV is positive. So under this assumption we do recommend to accept the project.

(All the calculation in the attached spreadsheet)