Chinese steel makers and electricity firms are paying exorbitant prices for ageing bulk carriers ready for immediate use, in desperate attempts to control soaring transport costs, industry executives say.
Freight rates for dry bulk cargoes <.BADI>, such as iron ore, coal or grains, have more than doubled since January and are unlikely to come down significantly in the short term, mainly due to China's insatiable demand for raw materials, coupled with serious port congestion around the world, such as in Australia. "In the past one or two months, Chinese steel mills and the Koreans have begun buying ships," said an official from a ship broker. "I'm surprised. They are desperate." "There aren't many such ships for sale. But when they get offered, they get snapped up at high prices." Another official said Rizhou Iron and Steel Co Ltd, based in the northern province of Shandong, home to China's biggest iron ore port, bought a 12-year-old Panamax-sized ship for a staggering $68 million - an amount that could almost finance two new ships if ordered in China, although they would not arrive before 2010. Asked about the purchase, a Rizhou Steel vice president said: "Yes, do you have any ships to sell?"
Another executive at Rizhou Steel said the firm bought three Cape-size and two Panamas from Greece and Japan this year, of which three had arrived and the other two would be delivered next year. The company also hoped to buy at least 10 more ships.
"Buying a ship, even though it is very expensive, is cheaper than booking a ship at the current rate."
Shipping officials say such purchases are helping propel freight rates northwards. While most officials agree the levels are now dangerously high and there might not be much scope for further increases, sentiment remains bullish with no reasons in sight for rates to come down.
A new Cape-sized vessel, to be completed in May, fetched a record price of $148 million last month, up from below $100 million at the start of the year, shipping officials said.
Without curbing freight rates it would be near-useless for steel mills to try to limit 2008 prices for iron ore in talks with top global miners, such as Brazil's Companhia Vale do Rio Doce, Australia's BHP Billiton and Rio Tinto, officials said.
Traders said rates for bringing iron ore from Brazil to northern China in the near future stood at an all-time high of about $100 a tonne, nearly three times the $35 at the start of the year and the price of term iron ore cargo of about $50 a tonne.
"The iron ore negotiations this year are not important," said one iron ore trader, based in Beijing. "Unless you can do something about the freights, it makes little difference whether you get a 30 percent price hike for ore, or 50 percent."
While major steel mills, such as Baoshan Iron and Steel Co or Angang Steel Co Ltd, have already ordered new ships, including very large ore carriers, most will not be completed for years as shipyards around the world struggle to clear bulging order books.
Unlike steel mills or power generators from Japan or South Korea - other major buyers of iron ore or coal - Chinese players seal fewer long-term shipping contracts or vessels, making them particularly vulnerable to volatile freight rates, shipping officials said.
"It's not only steel mills. Power stations are also buying ships. They've got to get lots of coal from the north to the south," said a senior official from a major Chinese shipper, adding one company in the south had bought four ships in October.
Asked if it was not risky to buy ships when prices were so high, one shipping executive said: "You can make ends meet at present. They aren't planning to hold on to the ships for the next 15-20 years. They want to use them in the near future, and sell when done."
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