China's ravenous appetite for iron ore and coal, the two main commodities shipped in the dry bulk market by volume, has transformed the maritime industry, with mining and shipping firms building bigger and bigger vessels to meet its demand.
Vale, the world's biggest iron ore producer, was scheduled to take delivery of the first of more than 30 400,000-ton iron ore carriers in the first half of 2011. The ships, to be delivered through 2013, will surpass the largest bulk carrier now in operation, the 365,000-ton MS Berge Stahl.
The arrival of these so-called Chinamax carriers will not only cut costs for Vale but will also lower freight rates for the entire industry, as the new vessels swell an already oversupplied market.
"This will be the biggest factor affecting the market for at least a couple of years, with the big increase in supplies driving down the market," said Rahul Sharan, senior analyst at Drewry Shipping Consultants.
The Baltic Exchange's Dry Index , a composite of global trade routes for dry commodities, has fallen nearly 30 percent this year to 2,173 points due to ample tonnage and the expected flood of new vessels next year.
Oversupply Problem
Vale's gigantic ships, which will be longer than the 324-metre-high Eiffel Tower, were expected to exacerbate the oversupply problem and could push the benchmark index below 2,000 points next year, analysts said.
That translates into less money for shipowners, many of whom oppose Vale's new carriers.
"We don't need (Vale's) ships," said Torben Skaanild, chief executive of BIMCO, the world's largest shipowners' group.
"We have quite a huge inflow of capesizes of 150,000 to 180,000 tonnes coming to the market. If you start building 400,000 tonne ships, it is going to take them out of the market."
A Vale spokeswoman declined to comment on industry criticism surrounding its Chinamax vessels.
Credit Suisse estimated that Vale's ships could displace as many as 168 capesize vessels, representing around 15 percent of the existing fleet, forcing them into shorter routes from long haul voyages.
"Given the size of these vessels and lower cash breakeven costs than current spot rates, we believe the likely deployment of these ships on the Brazil-China route could leave the capesizes with no spot cargo demand," said the bank's shipping analysts in a monthly research report.
Average earnings for capesize vessels, typically used to ship iron ore and coal, could tumble between 20 and 35 percent next year to under $25,000 a day, analysts said. Earnings for smaller dry bulk ships, which carry everything from grain to cement, were also expected to decline.
The chairman of China COSCO , the world's largest dry bulk firm, told Reuters last month it strongly opposed Vale's mega vessels and predicted the industry's oversupply problem would prevent a recovery until 2013 at the earliest.
The global dry bulk fleet was expected to expand by 11 percent next year to 594 million deadweight tons, outpacing demand growth of 8 percent, according to Macquarie Securities.
"It looks like supply and demand could be back in balance by 2012, but much of this will depend on whether the current low rate environment discourages new orders," said Janet Lewis, shipping analyst with Macquarie.
The freight industry was battered by the economic downturn two years ago and has struggled to recover, with the dry bulk market still down more than 80 percent from its peak in May 2008.
Competitive Edge
The volatility in the spot market prompted Vale to build its own fleet of mega ships, which will allow the company to better compete with Australian rivals BHP Billiton and Rio Tinto .
Due to the longer distance from Brazil, Vale typically pays a $15 a ton premium to ship iron ore to China, compared to its Australian counterparts. That premi
