The fragmented shipping industry is one of the most essential industries for continuous globalization and growth; industry prospects are surprisingly stable in contrast to the normal logistics businesses that are highly cyclical. The factors that drive average daily hire rates are the age of vessels, market condition, the supply and demand and the size of the ships.
Daily hire rates are found by the interaction of the supply and demand of vessels. The supply is influence by market demand for shipping capacity, the efficiency and size of vessels and the rate of scrapping. The demand is influenced by the situation of the world economy, technological changes and trade patterns. There is a strong positive relationship between spot/time charter hire rates and demand for iron ore vessel shipments (exhibition 5). This is due to the fact that rates are set by current market conditions and expectations that also influences investment decisions in new vessels.
Spot hire rates are expected to decrease next year because there is a big number of vessels order for next year, according to exhibit 3. Compared to exhibit 2, it’s a big proportion. So the supply will be large, leading the rates to decrease. In the next few years, there will be a large supply of new capsize vessels. And also, there will be some vessels that are over 24 years and will be scrapped. But the old vessels just total a small portion. So the influence that brought by the old vessels’ scrap is minor. Another point is, if Australia and India ore export is going well in the next few years, it would be very good for this industry and make the hire rates decrease. According to calculation, the 15 years’ plan will generate positive NPV as compared to NPV of 25 years plan.
The forecast is highly optimistic about the industry’s long-term prospects with continuous growth. Real economic growth will give rise to higher demand for the commodities transported and spot rates will alienate with the ones from 2000. In fact, in 2002 the iron industry will recover, especially because of an increase in the trading volumes, thanks to the growth of the Indian and Australian market, also influenced by the efficiency gains due to gradual technological improvements.
The choice of making 3 installment payments provides the company with a large non-recurring capital outflow in 2 short years that will cause grave liquidity constraints, investing $500,000 in net working capital compensates for this. However, Ocean Carriers should try to increase the payments period in order to be able to keep working capital at higher levels.
Reevaluating the capital structure is strongly recommended since lower costs would decrease the discount rate and increase the NPV. The corporate strategy obviously has to be reevaluated concerning when to decommission the vessel since this makes the project not financially supported. The higher costs of operating an older vessel is obviously lower that the gains of doing so.
There need to be more data to support that the firm is able to lock higher prices which would enable them to receive higher cash flows and with greater certainty. Extending the years of service for the vessels from 15 to at least a span where NPV is positive is crucial for future projects to be even considered.
Courtney from Study Moose
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