shipping

Miner takes ore war to high seas as it ties up bulk carriers
BHP Billiton has made an aggressive play to corner the global market for large bulk carriers.

The move is a response to China's decision to shun Australian iron ore producers in favour of Brazil.

BHP has rapidly hired so many ships to transport iron ore to China that it has created a worldwide shortage of large bulk carriers, sent global freight rates soaring to all-time highs, and triggered record-breaking charter deals for Western Australia cargoes for 10 consecutive days.

By Thursday, the mining giant had chartered as many as 29 large bulk carriers in three weeks -- including 12 in the past three days. That compares with the 13 ships BHP chartered to ship ore from the Pilbara to Asia in April, and 20 last November, when shipping freight rates last peaked.

BHP's success in cornering the market has pushed iron ore shipment costs for its chief competitors in Brazil and Australia to fresh highs.

Takeover target and rival Rio Tinto overnight Thursday paid an Australian record for an early June cargo, and daily charter rates to haul ore from Brazil to China broke the $US300,000-a-day barrier for the first time.

The ship was chartered at a daily rate of $US303,000 ($315,400), three times higher than the price for its previous journey a month ago.

"It's not a question of getting this ship or that ship. It's finding any ship," said Nick Collins, a director at leading London shipbroker, Clarksons. "Ship owners can name their price."

These "astounding" prices reflected "the mother and father of all shipping cycles", he said.

The acute shortage forced Rio Tinto to pay top dollar to book seven large bulk carriers, known as capesize vessels, on Wednesday and Thursday.

The rates broke the record set by rival Fortescue Metals Group earlier this week.

Rio paid $46.50 per tonne for iron ore freight -- $2 more than Fortescue more than 10 days ago, and double the price a year earlier.

"You have 100 per cent utilisation right now, and are looking at demand outpeforming supply for the whole of this year," said Carsten Mortensen, president and chief executive of Danish listed shipowner Norden.

"There are three ships for every four cargoes."

BHP is regarded as among the most aggressive and strategic players in the shipping business, using its weight as one of the largest charterers of the world's 5500 internationally traded bulk carriers and a major derivatives trader to secure the most competitive deals for its commodities shipments.

This month's aggressive tactics have been instrumental in pushing the Baltic Dry Index, a global benchmark of commodity freight rates, up by 20 per cent this month to peak on Wednesday at a record 11,793 points.

Strongest rates growth to hire the 750-strong fleet of capesizes -- mostly used to transport coal and iron ore cargoes -- has been in Southeast Asian trade routes, on the back of intense competition in the Pilbara.

Underpinning the rush on ships has been China, the destination for about 25 per cent of the world's dry bulk shipments.

Chinese demand for iron ore has soared as strong steel prices lead mills to increase export production.

May iron ore imports look set to exceed April's all-time high of nearly 43 million tonnes, as the country amasses a stockpile of almost 80 million tonnes.

The head of London's Baltic Exchange, which compiles commodity freight indices, also said deadlocked iron ore price contract talks between Rio, BHP and China had boosted shipping rates.

Chief executive Jeremy Penn said China had turned to Brazil for larger volumes of iron ore after Australian producers moved to sell the commodity at premium spot prices.

"China appears to be moving more ore from Brazil, and this has consequences, as there's then a need for additional vessels in the Atlantic," Mr Penn said.

"This affects the tonne-mile equation, as ships take longer to complete journeys."

Brazil's Vale agreed to price increases with Asian and European steel makers of between 65 per cent and 71 per cent in February, taking its price to about $US118 a tonne.

Earlier, Vale had cancelled 50 cargoes to China at the height of negotiations, causing freight indices to plummet and lose nearly half their value in a series of record one-day falls.

Australian miners have demanded increases of as much as 80 per cent to incorporate a freight premium that reflects their cheaper shipping costs.

Brokers said the rates rally began on April 21 when a major broking house was at the centre of a frenzied bidding war to book a capesize ship to take iron ore from Brazil to steel mills in Europe. The vessel's owner initially agreed to the going daily rate, a healthy $US140,000.

Later, he changed his mind and within 24 hours the agreed price had risen twice and the deal closed at a staggering $US192,500.

"I've never seen a jump like that in one day," said a broker on the trading desk, who declined to be identified.

"Then we all started wondering where we would find ships.

"It was only then everybody started realising that nobody was hiding them. There just weren't any available."

Freight rates immediately spiked on news of the deal, which reverberated in global shipping circles.

By early May, capesize ships on that route had hit rates of $US200,000 a day and continued north.

Owners with ships focused on Australian iron ore trades abruptly left the Pacific for the Atlantic, where they could rake in higher profits.

With break-even costs of about $US20,000 to $US30,000 daily, owners can now count daily profits of $US250,000 for each ship.

On May 12, BHP made its move, as news emerged of China's threats to boycott Rio for selling iron ore on the spot market.

From May 13 to May 15, BHP booked 16 ships as delays at terminals exacerbated the shortage and port congestion in Australian, Brazilian and Chinese ports began to rise.

The Baltic Dry Index hit a record on May 15 -- surpassing the previous record set last November -- and continued to break records for the next four days.

Rio Tinto and Vale declined to comment. A BHP spokesman said: "Current activities are in line with our normal business activity. It's just a fact that some months are busier than others.

"It's very simple: what drives this market is pure supply and demand," said George Economou, the Greek-based chairman and chief executive of the world's largest listed dry bulk shipowner, DryShips.

"When there's huge demand it works in favour of the bulk carriers.

"We saw this coming and now the bullishness is here for months ahead and rest of the year." – The Australian