The demand capacity of the ships is expected to remain stagnant of the next two years, according to the case. However, increase in trading volumes will start from 2003, whereas Australian and Indian ore exports would begin. Spot rates are therefore expected to fall in 2001 and 2002, where they are expected to increase in 2003. Therefore demand will decrease in 2001, where an increasing supply capacity and a decreasing demand capacity would lead to higher daily spot hire rates.
Average daily hire rates are determined by the demand and supply. Supply is set by the available ships and the efficiency of the ships. The amount of available ships is defined by the number of ships in the previous year, minus the ships that are being scrapped, and plus the ships that will be ordered, as mentioned before. Availability of the ships is also determined by the maintenance and repair days of a ship. What cargo the vessel carries, world economy and changes in trade patterns are factors that set the demand.
The long-term prospects are optimistic. The long-term forecast for worldwide iron ore vessel shipments was for 2% annual growth during 2002 to 2005, and then dropping to 1.5% thereafter, according to the case. This is also supported by the calculation made in Exhibit 6, where economy factors for this business seem favorable.
In order to determine whether Ms Linn should purchase a $ 39 million capesize, a net present value analysis need to be conducted (see Appendix). There are two different scenarios - that Ocean Carriers is