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OCEAN CARRIERS

Case Study

Submitted by
Fozia Abid
Maryam Noor
Nadia Farooq
Umar Farooq
Hamza Tariq
Muhammad Mohsin

LAHORE SCHOOL OF ECONOMICS

Ocean Carriers Report


The fragmented shipping industry is one of the most essential
industries for continuous globalization and growth; industry prospects
are surprisingly stable in contrast to the normal logistics businesses
that are highly cyclical. The factors that drive average daily hire rates
are the age of vessels, market condition, the supply and demand and
the size of the ships.
Daily hire rates are found by the interaction of the supply and demand
of vessels. The supply is influence by market demand for shipping
capacity, the efficiency and size of vessels and the rate of scrapping.
The demand is influenced by the situation of the world economy,
technological changes and trade patterns. There is a strong positive
relationship between spot/time charter hire rates and demand for iron
ore vessel shipments (exhibition 5). This is due to the fact that rates
are set by current market conditions and expectations that also
influences investment decisions in new vessels.
Spot hire rates are expected to decrease next year because there is a
big number of vessels order for next year, according to exhibit 3.
Compared to exhibit 2, its a big proportion. So the supply will be large,
leading the rates to decrease. In the next few years, there will be a
large supply of new capsize vessels. And also, there will be some
vessels that are over 24 years and will be scrapped. But the old vessels
just total a small portion. So the influence that brought by the old
vessels scrap is minor. Another point is, if Australia and India ore
export is going well in the next few years, it would be very good for
this industry and make the hire rates decrease.
According to calculation, the 15 years plan will generate positive NPV
as compared to NPV of 25 years plan.
The forecast is highly optimistic about the industrys long-term
prospects with continuous growth. Real economic growth will give rise
to higher demand for the commodities transported and spot rates will
alienate with the ones from 2000. In fact, in 2002 the iron industry will
recover, especially because of an increase in the trading volumes,
thanks to the growth of the Indian and Australian market, also
influenced by the efficiency gains due to gradual technological
improvements.

The choice of making 3 installment payments provides the company


with a large non-recurring capital outflow in 2 short years that will
cause grave liquidity constraints, investing $500,000 in net working
capital compensates for this. However, Ocean Carriers should try to
increase the payments period in order to be able to keep working
capital at higher levels.
Reevaluating the capital structure is strongly recommended since
lower costs would decrease the discount rate and increase the NPV.
The corporate strategy obviously has to be reevaluated concerning
when to decommission the vessel since this makes the project not
financially supported. The higher costs of operating an older vessel is
obviously lower that the gains of doing so.
There need to be more data to support that the firm is able to lock
higher prices which would enable them to receive higher cash flows
and with greater certainty. Extending the years of service for the
vessels from 15 to at least a span where NPV is positive is crucial for
future projects to be even considered.