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Dry-bulk shipping still reeling from credit binge

A 2004 photo of China State Shipbuilding Corp (CSSC) yard in Shanghai. A wave of cash fuelled by cheap debt allowed China to edge South Koreas as the world's top shipbuilder in the last decade.


From the FT's Lex blog

To check the health of the dry-bulk shipping industry, don't bother inspecting bunker fuel prices or cargoes leaving the Pilbara.

Focus on the ongoing orgy of destruction in the ship-breaking yards of South Asia. According to STX Pan-Ocean, South Korea's largest owner/charterer of bulk vessels, more tonnage could be demolished this year than in the last eight years combined. Ditto next year, as fleet operators get more new deliveries than they know what to do with.

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This is what happens when an industry takes collective leave of its senses. For much of the early part of the last decade, dry-bulk order books bore an identifiable relationship to real demand. But as credit flowed more freely and faith in the commodities "supercycle" grew stronger, orders piled in, many of them to a new breed of state-backed Chinese shipyard.

So undiscriminating was this wave of cash, in fact, that China's total shipbuilding market share edged ahead of South Korea's -- the first time that such a change had happened without some kind of technological stimulus. Orders had migrated from Europe to postwar Japan as welding replaced riveting, for example, then from Japan to South Korea as floating docks replaced land-based yards. All China offered was speed, capacity and cheap, pliant labour.

Restoring sanity will take time. As the Baltic Dry Index -- a compendium of freight rates for vessels of various sizes -- remains more than 80 per cent below its absurd pre-crisis peak, most companies' total charterage costs have mercifully eased.

Still, the fact that Bloomberg's global index of pure dry-bulk shipping companies hit a record low this week suggests that charges for depreciation, port, and fuel will keep the squeeze on. For now, the business of stripping down surplus vessels for parts will remain that rare thing in 2011: a sure-fire growth industry.

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