According to the article, the daily spot hire rates for shipping capacity are determined by supply and demand. Supply is calculated by adding the current fleet size with any new ships and subtracting scrapings and sinking. Exhibit 2 indicates a limited number of ships older than 24 years that will likely be scrapped. However, ships in the 15-19 age group will continue to contribute as they enter the second-hand market. Most of the fleet is relatively young and there are plans to order 63 more vessels in 2001, suggesting an increase in supply. On the other hand, demand for dry bulk capsizes depends on the global economy and relevant industries. With no significant growth expected in either, we predict stagnant demand for shipping capacity.
According to the article, exports of iron ore and coal are expected to remain unchanged until 2003. This will result in stable imports of these commodities for the next two years. Since 85% of the ship’s cargo consists of iron and coal, it can be assumed that the demand will be similar to what was seen in 2000. This supply and demand situation suggests that hire rates for capesizes may decrease as shipping capacity increases. The article also mentions that daily hire rates are influenced by factors such as current vessel numbers, additions or scrapping activities. When there is high market demand for shipping capacity, owners tend to keep their vessels operational for longer periods. On the other hand, low demand often leads to an increase in vessel scrapping.
The size and efficiency of ships have an impact on supply. Larger and more efficient ships require fewer in order to transport the same cargo amount. Analysts primarily consider the global economy when assessing the demand for capesizes. A thriving economy leads to increased production and demand for iron ore and coal. Demand can also be affected by changes in trade patterns, such as an increase in distance between supply and destination of iron ore. This would result in higher demand for capesizes. The daily hire rate is influenced by operating costs, which currently amount to $4,000 per day and are projected to increase by 1% above inflation. Ocean Carries should consider unexpectedly high operating costs when determining the daily hire rate.
The factors above play a role in determining the daily hire rates; although they are not definitive and completely trustworthy, they will guide the decision-making process. Furthermore, the long-term outlook for the capesize dry bulk industry depends on market conditions, demand, technology, and efficiency improvements, all of which impact the demand for dry bulk capsizes. More than 85% of the cargo carried by these capesizes consists of iron ore and coal, which experience an increase in demand during a robust economy. According to long-term projections, iron ore shipments are expected to grow at a rate of 2% annually from 2002 to 2005, with a subsequent drop to a continuous growth rate of 1.5%. Additionally, the commencement of Australian and Indian ore exports in 2003 is likely to result in higher trading volumes.
Based on the large trading volume of iron ore and industry conditions, the capesize dry bulk industry appears promising in the long-term. We anticipate that profitability will continue to thrive as technology improves ship efficiency, reducing the number of ships needed to transport cargo. Furthermore, as shipbuilding costs decrease and innovation progresses, profits are expected to increase. In conclusion, the long-term outlook for the capesize dry bulk industry is optimistic.
Considering the provided information, our group utilized an excel spreadsheet and the NPV function to calculate the project’s NPV under both tax and tax-free conditions. For a comprehensive calculation of NPV, please see Appendix Under 15-yr.
According to our calculation, we have the following results: In the first case scenario, where the firm is subject to a tax environment (35% income tax), the NPV of the project is -$6,366,054.53. In the second case scenario, where the firm operates in a tax-free environment, the NPV is -$834,638.76. According to the NPV rule, Linn should not proceed with the project due to the negative NPV in both scenarios. From the firm’s perspective, the policy of not operating ships older than 15 years aims to mitigate uncertainty and achieve a higher market premium by having relatively young vessels instead of old ships.
Based on our calculation of the NPV of the project, assuming the company operates the ships for 25 years, the results show that the NPV is better compared to not operating ships for 15 years. The firm should take the project under the tax-free environment since the NPV is positive in that scenario. (For a detailed calculation of NPV, please refer to Appendix Under 25-yr.)
However, the firm’s policy is not effective and not a good investment because it misses out on the opportunity to benefit from the ROI in the later years of the ships due to the restrictive policy. It would be more beneficial for the firm to choose to operate the ships for a longer period.
