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Demand from China spurs conversion of tankers into bulk carriers
By Nao Nakanishi ReutersPublished: August 30, 2007


HONG KONG: Dozens of old tankers are being converted into bulk carriers for China as shipyards around the world fail to meet demand for new vessels, despite record freight rates for hauling raw materials like iron ore.

Industry officials say docks, mainly in China, are turning single-hull very large crude carriers into very large ore carriers instead of refurbishing them as double-hull very large crude carriers by a 2010 deadline to meet safety regulations.

While rates for dry cargo have climbed nearly 70 percent so far this year to new records, tanker rates have lost about 40 percent. Single-hull crude carriers are trading at discounts to double-hull crude carriers as they are being phased out.

In addition, it takes only about six months to complete such conversions, while it would take four years to five years for a new bulk carrier to be delivered if it were ordered today.

"More tankers are being converted into dry bulk carriers. I think there'll be about 40 in the next two years," said Li Jian Xiong of Cosco, a shipping conglomerate.

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Cosco alone plans to turn 10 tankers into bulkers in the next two years, with a few of those already undergoing conversion.

Other officials estimated there were 25 to 30 single-hull tanker candidates worldwide that could be given a new life as huge bulkers. However, it was still to be seen if all could be realized as dry-dock conversion capacity is limited.

"We're also considering such conversions as we have single-hull tankers," said Masafumi Yasuoka, executive officer of the coal and iron ore carrier division at Mitsui OSK Lines.

"But we haven't made up our mind quite yet, as shipyards are also in short supply," he added. Mitsui has one of the biggest fleets of ships in the world.

The officials agreed that the dry bulk market could easily digest the additions as it faced a serious shortage due to surging demand for transporting iron ore. The conversion, on the other hand, might help clear an overhang in the tanker market.

Data compiled by SSY Consultancy showed there were only 27 ore carriers at present, with a couple to be added this year and another 12 next year. The tanker market expects about 15 new crude carriers this year, more than 40 next year and nearly 100 thereafter.

The officials calculated it would cost up to $30 million to turn a crude carrier of about 260,000 deadweight tons (the weight of cargo, fuel, supplies, passengers and crew carried by a ship) into a bulker of about 230,000 deadweight tons. That is larger than the largest traditional bulk carriers, which are capable of carrying from 140,000 to 200,000 tons of iron ore or coal.

After the conversion, the crude carriers would have another 10 years as ore carriers hauling iron from Brazil to China, which is constructing several deep ports to accommodate such ships.

"China is just insatiable for iron ore," said Matthew Flynn, managing director of Flynn Consulting, a transport research consultancy based in Hong Kong. "They've got new ports. They are building new barges for moving iron ore up the Yangtze River," he added.

China is the top steel producer and iron ore importer in the world, and its surging iron ore imports have been a major factor behind the rise in freight rates.

The Baltic Dry Index, which covers dry bulk shipping rates, reached a record of 7,474 points by Wednesday, up two-thirds from early this year and more than eightfold from early 2002.

The officials said there would be a shortage of bulk carriers for at least another few years, despite turmoil shaking global financial markets, including equities, bonds and commodities.

"It's incredible. The dry bulk shipping market just keeps on going up," said Martin Rowe, the managing director of Clarkson Asia.

"People believe China will continue to absorb an ever-increasing quantity of raw materials, irrespective of what happens in the United States and Europe."

The officials also said that port congestion in Australia was not improving much to free up ships. Expansion of port and railway facilities lagged demand growth, meaning shipping is tied up in lines outside port.

Asked if the increasing number of conversions from tankers into ore carriers could tip the balance, Yasuoka said: "We don't expect any major impact."

He said ore carriers were too large for Australia. They would be ballasted to Brazil to bring ore to China. This meant one could carry only about 1 million tons per year, compared with an annual rise of 50 million to 60 million tons in Chinese iron ore imports.