Ocean Carriers Case Questions

Ocean Carriers Case I Questions

1. Do you expect the daily spot rate to increase or decrease next year?

In 2002, as Linn anticipates, spot rates will likely fall as the imports of iron ore and coal will probably remain stagnant. A similar trend can be seen in 1997 to 1998 and 1995 to 1996. In both instances iron ore vessel shipments remained steady while the average spot rates sharply decreased.

2. What factors drive average daily hire rates?

Daily hire rates are determined by supply and demand. For example, when demand goes up, owners’ are likely to keep vessels as long as possible. Consequently, daily hire rates increase. Conversely, when demand goes down, owners’ are likely to scrap the vessels and daily hire rates decrease. Additionally, as ships got bigger, faster, and more fuel efficient, fewer ships were needed to carry the same amount of cargo, and thus, supply goes down. However, increases in size and efficiency offered by the newer ships offers a 15% premium in daily hire rates as opposed to ships over 25 years old which carry a 35% discount.

3. Should Linn buy the Capesize?

According to our analysis, Linn should not purchase the Capesize. After 15 years, Linn will suffer a loss on in both the U.S and Hong Kong. After 20 years, Linn will still lose money in both locations, albeit less money. Finally, in the 25-year analysis, Linn will be able to turn a small profit in Hong Kong while still suffering a loss in the U.S. Although the 25-year time frame allows for a gain in Hong Kong, such a gain is highly contingent on the salvage rate which may be volatile subject to new technology, ship defects, etc. Thus, the profits gained by the keeping the ship longer are not worth the risks inherent in the unpredictable scrap value.

Brief Summary of Analysis – Expanded in Excel Worksheets (attached)

|Years |U.S. (Gain Or Loss) |Hong Kong (Gain Or Loss) |

|15...