Ocean Carriers

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Financial Management

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
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NPV increases as the life of ship increases. However, the incremental value keeps decreasing from 15 years to 25 years and closed to 0 at the age of 25. It is indicated that 25 years would be the optimal NPV of this project. Ocean
Carriers should choose 25 years as their project life cycle.

NPV in different project life cycle
4000000
3500000

US Dollar

3000000
2500000
2000000
NPV

1500000

Incremental

1000000
500000
0
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25

27

Life 0f ship

Figure II the NPV comparison between 15 years and 25 years in Hong Kong and U.S

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days

Hong Kong 25years
E x p e c t ecd s t ( 1 % + o C a l e n d a r a i l y H i irn f l a t i o n
D
e
Ye a r
Ra te
3 %) days 2001
2002
2003

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