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Submitted By chigonchen

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Words 3919

Pages 16

What factors drive average daily spot hire rates?

The average daily spot hire rates is determined by supply and demand. However, it is not entirely fluctuated with the economy. Since the shipping business could be customized by different requirement, such as market demand for across the global economy, the size of ship and the age of vessel, the number of current ships in service, expected number of ships to be commissioned and the performance of current or future ships to reduce required supply, these factors could derail the hire rate away from the demand curve of iron ore. As shown in the Table I, the correlation coefficient between iron ore vessel shipments and average spot rate from 1994 to 2000 is only 0.18. On the other hand, the correlation coefficient between fleet size and average spot rate during the same period shows much better correlation, 0.98. It means that the market requires bigger ship for delivery and it could divide this market into several markets in terms of fleet size. Therefore, we should regard the size of vessel as a significant factor.

Correlation Coefficient avg. spot rate avg. 3yr charter rate

iron ore vessel shipments 0.18

-0.38

fleet size

0.98

0.86

Table I Correlation Coefficient between iron ore vessel shipment, fleet size and average spot rate

Should Ms. Linn purchase the $39M capsize? Hong Kong or the U.S? (Ocean Carriers uses a 9% discount rate.)

To analyze these two scenarios, we choose to calculate net cash flow and IRR for every year. The detail calculation is attached in the appendix and the methodology of this approach is enlisted as below.

Formula for NPV, IRR calculation

1.

Gross operating revenue = Expected daily hire rate X Number of days operating

2.

EBIT = Gross operating revenue – Yearly operating costs – Total depreciation

3.

EBIT...

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