Ocean Carriers Analysis

Our team has conducted a detailed analysis of the capesize fleet and underlying market demand. Please find below our interpretation of the market trends and future projects, and the breakdown of the possible operation scenarios for the new ship. We have also attached the supporting documents that illustrate our analysis.

Our team initially expects the daily spot hire rate to decrease over the next two years. The decrease will result from falling growth rates for iron ore shipments and imports of iron ore coupled with stagnant coal demand. Projections also show that the worldwide capesize fleet will increase based on the number of expected deliveries and the reduced amount of ships being scrapped due to the young fleet age. However, in 2003 and beyond, we expect daily spot hire rates to stabilize and increase. This increase will result from projected growth in iron ore shipments as Australia and India experience increases in iron ore exports.

The average daily hire rates of the fleet are influenced by three main factors. First, the world economy will influence the rates. As the economy grows, production and demand for iron ore and coal increase which results in higher trading volumes and greater demand for capsize fleets. Thus daily hire rates will increase. Secondly, trade patterns will create a fluctuation in the hire rate. Changes in trade patterns between countries could affect the demand of capsize fleets which in turn could affect daily hire rates. Lastly, the age of a vessel will impact the daily hire rate. For example, newer vessels that are bigger, faster, and more fuel efficient, would command higher rates as compared to older vessels.

In terms of long term prospects, we expect the capesize dry bulk industry to enjoy steady long term growth. Iron ore shipments are expected to increase 2% per year from 2003 to 2005 and then 1.5% onwards for the next 20 years. Average charter rates are expected to follow the same patterns since these are strongly correlated with iron ore shipment rates.

The purchase price of a new carrier is $39 million. If Ocean Carriers pays the entire cost up front when the order is placed, the cost would be $39 million in present day dollars. If Ocean Carriers elects the installment payment option, the present day value of the installment payments would be $33.74 million. Therefore we recommend the installment payment option because the company would save $5.26 million in present day dollars.

There are four different options regarding operation and selling of the new ship. The carrier can either operate the ship in a country having a marginal tax rate of 35%, or it can operate in a country having no marginal tax rate. The carrier also