Feb 29 (Reuters) - Dry bulk transporters, already hit by an oversupply of ships, could be forced to operate their vessels below breakeven for a much longer period than feared as top iron ore consumer China looks to cut down on imports.
China's iron ore imports may fall up to 14 percent this year as domestic output ramps up, a mining industry group said on Wednesday. The country buys about 60 percent of the world's seaborne iron ore.
The commodity makes up for nearly half of the global drybulk cargo that is transported by sea in vessels owned by companies such as Genco Shipping & Trading Ltd , Excel Maritime Carriers, Diana Shipping and DryShips.
"Decline in Chinese iron ore imports for 2012 would be a highly negative development for the (larger) capesize markets," said Rahul Kapoor, a Singapore-based analyst at investment bank RS Platou Markets.
The Baltic Exchange's main sea freight index, which tracks rates for ships carrying commodities such as iron ore, coal and grains, has fallen 84 percent from its highs in 2008.
"The market is still pricing in ore imports to continue growing year-on-year, albeit at a slower pace than 2011 and help capesize segment stage a recovery in 2H12 from the current depressed levels."
Capesize vessels, which commanded rates of more than $50,000 in their heydays of 2008, now manage just $6,000, below even those earned by smaller and nimbler ships such as panamaxes and supramaxes.
"A company like Genco would be negatively impacted because their contracts are mainly index linked. If Baltic dry index is low, their earning will be low," Nordea Markets analyst Anders Karlsen said, adding that DryShips could also be affected because not all of its vessels are contracted.
Sales of second-hand capesize and panamax vessels have been limited lately, as shipping companies were hoping that the global steel market would rebound soon and spur iron ore demand.
That seems unlikely now with weak China imports.
RS Platou's Kapoor said weak freight rates now could lead to a significant rise in scrapping of older ships and severe cash flow problems for dry bulk owners.
Shipping companies are already facing the threat of seizures of their vessels as banks lose patience with an industry struggling with overcapacity and falling demand.
"We are facing a very severe situation in the dry bulk market. Further tightening in the banking market will reduce availability of funds to these companies," Rikard Vabo of Fearnley Fonds said.