1. How would you characterize the long-term prospects of the capsize dry bulk industry? What do you make of the difference in the current spot rates and 3-year charter rates?
The long-term prospect of the industry is determined by the analysis of two sides: supply and demand. In the demand side, the demand mainly depends on the world economy, especially its basic industries. Over 85% of the cargo carried by capesizes was iron ore and coal. It is expected that Australian production in iron ore to be strong and Indian iron ore exports to take off in the next few years. So it is very optimistic for the long-term market demand for the industry. In the supply side. From Exhibit 2, we know that the capsizes in service now is 108. 25 ships is going to scrapped, a lot of new ships put much pressure on the rate. Therefore the rate will not fluctuate a lot. Daily spot hire rates are determined by supply and demand of shipping. Finally, the long-term prospect of the shipping industry is largely dependent on the growth of the global economy.
3-year charter rate changed more than iron ore vessel shipments, while the spot rate fluctuate more widely than 3-year charter rate. From the exhibit 2, worldwide fleet of capsizes was very young, less scapping in the next years. From the exhibit 3, we know that the number of new vessels is going down, supply increases slowly, daily hire rate expected to rise.
2. Should Ms Lin purchase the $ 39M capesize? Do your analysis in two different scenarios:
In the first scenario assume that Ocean Carriers is a U.S. firm subject to 35% taxation.
a). Calculate the EBITDA, using the formula: EBITDA= Revenue – operating cost. See attachment sheet 1.
b). Calculate the EBIAT, using the formula: EBIAT=(EBITDA-Depreciation)*(1-0.35). Please see sheet 2.
c). Calculate FCF, using the formula: EBIAT + Depreciation –CAPX –Change WC –After-tax sale proceeds. Please see sheet 2.
d). Calculate PV of FCF and the cost of ship, using discount rate 9%. Then sum all of the PV, we get NPV of the project, NPV= -7856 thousand. Please see sheet 2.
The NPV is negative, So Ms. Lin should not purchase the $39M capesize.
In the second scenario assume that Ocean Carriers is located in Hong Kong, where the owners of Hong