Ocean Carriers Analysis Report

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To characterize the whole industry, I want to talk about the supply and demand sides. These two aspects, together, decide whether this industry is going to be profitable in the future. After the demand and supply analysis, I would like to characterize this industry as promising and profitable.

The most important figure I would like to consider when thinking about the prospects of this industry is the charter rate. Charter rate is the most easily perceived concept related to the market prospects. The material has already given a prediction on the charter rate in the following years. So I won’t predict the figure again but will demonstrate the demand and supply analysis around charter rate.

For the demand side, this industry is backed up by developing countries, and will be taken to a new height in the following years. Developing countries are the main suppliers and consumers of iron ore in the whole world. Developing countries are consumers of these goods capsize bulk carrier shipped due to their huge population and infrastructure construction. They are also rely heavily on mineral exports to raise GDP. India, as the material mentioned, is highly possible to serve as a boost to this industry for its iron ore export is going to take off. Likely, China and Brazil will be important powers that push this industry forward, because they both have enriched mineral storage and need iron ore and coal to support their infrastructure establishment. The future demand seems to be sustainably strong given that these countries will stay in developing stage for decades.

Other than developing countries, the economy cycle and political situation are two factors that cannot be ignored when considering demand side. The economy crisis or economy downturn would undoubtedly impose negative impact on the demand side. But once the downturn ends, the huge need for infrastructure construction would increase the demand again. The political issue was also mentioned in the material, but we are convinced that the world situation would remain stable. These two factors are less important but need us paid attention to.

​`In terms of supply side, number of vessels in service, new delivered ships and technology improvement in ships are three factors we consider. For the first two factors, we believe that it is the world demand that determines the supply of vessels. Firms in this industry would adjust their number of ships in service to the situation. Occasionally they may even choose to scrap their ships if the charter rate is not very satisfying. The technology development is the most significant one among these three reasons. The technology would undoubtedly develop in the following years and it will improve the capacity of the ships and prolong its life-in-service. Moreover, the technology development might shorten the production time and lower the cost, bringing more flexibility to the finance activity of companies like ocean carrier. In short, we can expect a promising future for this industry after analyzing the supply side.

Besides the demand-supply analysis, another aspect is that this is a industry with very high entry-barrier. This character is strongly reflected in the cost of each vessel and the human-resource needed for running the business. High entry barrier means less fierce competition and more chances of profiting. This character ensures a bright future of this industry.

The capsize bulk carriers are always sufficiently supplied. The material has implied that the industry demand is very strong these years

4.Should Ms Linn purchase the $39M capsize? Make 2 different assumptions. First, assume that Ocean Carriers in a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempt from paying any tax on profit made on cargo uplifted from Hong Kong.

To determine whether Ms Linn should purchase the $39M capsize, we consider this problem under two scenarios. First, we assume that Ocean Carriers is a U.S firm which subject to a taxation of 35%. Second, we assume that Ocean Carriers is a Hong Kong Firm of which the owners are not required to pay any tax on profit made overseas and nor required to pay any tax on profit made on cargo uplifted from Hong Kong. Under these two scenarios, we also made three different assumptions:

- Assuming the firm is using 15-year straight-line depreciation method with a salvage value of $5M at the end of the 15th year

Depreciation for each year = ($39 M- $5M)/15=$2,266,666.7

- Assuming the firm is using 25-year straight-line depreciation method with zero salvage value at the end of the 25th year

Depreciation for each year = ($39 M- $5M)/25=$1,360,000

- Assuming that the firm is using 25-year depreciation method but will sell the ship to the second-hand market after 15 years. It’s market value equals to the book value after year 15

Deprecation for each year= $1,360,000

Book Value after 15 years= $39M-$1,360,000*15=$18,600,000

In According to our calculation (see appendix XXX), in the tax environment with tax rate of 35%, the NPV is -$ 4,765,620.97-$ using 15-year straight line depreciation with $5M salvage value, -$5,612,054.38 using 25-year straight line depreciation with no salvage value and -$3,686,912.50 using 25-year straight line depreciation and sell to second-hand market after 15 years. Since the NPV is negative under the all assumptions, Ocean Carriers should reject the project when it is a U.S Firm. On the other hand, in the tax-free environment, NPV equals to $ 1,474,575.41, $3,326,802.07 and $4,900,004.18 respectively when scraping the vessel after 15 years using 15-year depreciation, scraping after 25 years using 25-year depriciation and selling to second-hand market using 25-year depreciation. Therefore, Ocean Carriers should purchase the $39M capsize when it is a Hong Kong firm because it has a positive NPV which creates value for the company. Moreover, Ocean Carriers should consider operate the ship for 25 years since it provides the highest NPV.

5. What do you think of the company’s policy of not operating ships over 15 years old?

Based on he case, Ocean Carries takes the policy of not operating ships over 15 years old. This shows that this company takes very conservative operating strategy and want to avoid the uncertainty during long business operation. According to the

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