Dear Ms Linn,
Aer a thorough in analysis of the opportunity to buy a new $39 million Capesize Carrier. We
came to the conclusion that we should never buy this carrier and register it in the United
States. This will in the most posi’ve scenario, in which the boat is leased every day it isn’t in
service, lead to nega’ve ne)o present value of $-6.4 million if we keep the boat for 15 years
and aerward sell the scrap metal for $5 million. We did also analyze if it would make a
di0erence if we keep our boats for 25 years and assume the scrap metals remaining worth is
$0. In this case we s’ll expect a nega‘ve ne)o present value of $-4.8 million. So clearly
registering the boat in the United States is not an op’on.
Another op’on is to register the boat in Hong Kong, a City-state with no tax for owners of
Hong Kong ships. We calculated that the ne)o present value of keeping this ship for 15 years
and lease it every day is equal to $1.7 million. And if we keep it for 25 years and discard our
15 year rule the ne)o present value is equal to $3.5 million. Thus the expected profit of
leasing the ship from Hong Kong for 15 and 25 years is posi’ve. But although the expected
pro:t is posi’ve we aren’t sure whether this is an a)rac’ve business case. But I will :rst
need to explain a li)le about the Capesize Carrier trade to support that.
Daily hire rates of Capesize Carriers are driven by the supply and the demand. Supply in this
case is of course the vessels, with the ships that are more e<ciently and minus the scrapings.
Because of the more e<ciently ships the supply could increase fast and nevertheless they
could now carry the same amount of cargo but with fewer ships.
The prospect of the industry depends on the demand of iron ore and coal, because that’s
what a large amount of the capesizes transport. The demand for iron ore and coal is
expected to increase. This will lead to an increase in trading volumes, which means that the
demand for ships will increase. Although we expect low prices next year because of a lot of
new ships coming into business. overall the prospect for this industry seems to be posi’ve.
That said you will understand the predic’ng the hire rates is di<cult task and that there is a
lot of uncertainty in these predicted pro:ts. $1.7 million seems like a large pro:t but spread
outlook for the last 10 years when this evalua’on takes place the ship must be hold on to. If
this isn’t the case discard the ship.