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) -- A monstrous ship steamed past Sugarloaf Mountain, the famous peak that rises from Rio de Janeiro's storied coastline.

Slowly the vessel, called the Vale Brasil, moved into Guanabara Bay, its wake ending in surf on the shoreline, and if the vessel's mighty girth looked as though it might plug the narrow straight that separates the bay from the open Atlantic, it would make for an appropriate image.

Freshly constructed by the Daewoo shipbuilding yard in South Korea, the ship last month was on a grand tour of Brazil, where it would eventually load its first cargo and make its maiden voyage from the iron ore-rich South American nation to the teeming steel mills of China.

Capable of hauling nearly 400,000 tons of iron ore, the Brasil became the largest dry-bulk vessel in the world the moment it hit the water. The ship is more than twice the size of the average Capesize dry-bulk vessel, and each of its seven cargo holds is the size of a single Panamax ship, the term given to the biggest ships able to clear the locks of the Panama Canal.

The Brasil is only the first of many so-called Very Large Ore Carriers (or "VLOCs" for short) now being constructed at shipyards in Asia, primarily for


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, the Brazilian mining giant, which has ordered an astounding 35 of them. Delivered in early May, the Brasil and the sheer scale of its carrying capacity have come to epitomize a massive glut that has stricken a once highflying industry, a business that at one time drew the avid attentions of retail investors chasing the next big thing.

It wasn't just retail investors doing the chasing. The boom years of the middle 2000s triggered almost as much insanity in shipping as they did in U.S. real estate. Ship owners and their banks, unable to envision a future downturn, commissioned so many new ships that no one fully grasped the extent of the binge until late 2008, after the financial crisis broke. That's when the first surveys appeared totting up the "orderbook" -- the total number of vessels requisitioned by the industry at large.

The number terrified. There were more dry-bulk ships on order than existed. Ever since, maritime professionals have been waiting for the coming glut to destroy shipping rates. It took almost two years, but finally it happened, in January this year.

"Everyone knows the issue is just capacity," says Martin Vera, a commodities and shipping derivatives trader with Freight Investor Services, in Connecticut. "It's very simple."

The oversupply has particularly injured the market for Capesize ships. This class of dry-bulk carrier, the largest on the oceans save the new VLOC mega-vessels, specializes in transporting iron ore. Because China's steel industry grew exponentially during the 2000s, consuming billions of tons of iron ore, Capesize vessels became the cash cows of the shipping world. Everyone wanted them. And banks almost gave away money for maritime entrepreneurs to order them.

In 2007, the number of Capesize ships in existence totaled about 840. Four years later, as of April 30, the number is 1,235, according to data compiled by the dry-bulk industry research firm

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Commodore Research & Consultancy


Last year, 214 freshly built Capes slid down the ramps at shipyards in Asia. In 2009, the number was 115. By the end of the year, Commodore predicts fleet growth of 230 to 280 Capes (as of April 30, 94 had already been delivered), which is on the low side of most industry projections. To put that in perspective, between 2001 and 2008, the average number of Cape deliveries per year was 37.

Meanwhile, the going rates for these ships on the spot market have plunged to levels never before seen. Earlier this year, you could rent a Cape for $7,000 a day. According to industry rule of thumb, it costs $10,000 a day just to keep a Cape in operating order. Stock prices have plunged in accord with the fundamentals.

Other classes of dry-bulk carrier haven't fared quite as badly. Part of the reason for the collapse in Cape rates has been their iron ore focus. "When you have an overcapacity issue, the ships with less versatility are less valuable," Vera says.

All of which is to say: The glut is severe. "It's tough to keep your chin up in this market," Vera continues. "Traders are very, very skittish, to say the least."

Says Elliott Etheredge, an investment banker at

Dahlman Rose

in New York who specializes in shipping finance, "It's been a very long time since we've seen something like this in maritime."

Executives at the publicly traded dry-bulk companies are loath to talk about the glut they helped create. One of the more financially strapped ship owners,

Eagle Bulk Shipping

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, declined to comment. And even the companies with the sturdiest balance sheets --

Diana Shipping

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and the

Navios Maritime Holdings

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family of companies declined to go on the record for this article.

Still, it's also nothing new. Scholars of the merchant marine will point out that vicious cyclicality has been a way of life in the shipping business since time immemorial. When times are flush, ship owners build ships. When those ships get delivered several years hence, freight rates collapse. Steady as the tides, driven by human nature, the cycle moves on approximately 30-year intervals.

The last severe glut occurred in the early to middle 1980s. Spiking oil prices in the 1970s drove a boom in demand for the kind of coal burned to generate electricity. The boom in demand for coal caused a boom in rates for the ships that hauled it. Ships were lined up "for weeks" at the big coal port in Virginia Beach, Va., recalls Barry Parker, a shipping industry consultant. "It's the same stuff as now, just different version of it," he says. Not until the early 1990s did demand catch up with supply and the dry-bulk business begin to mend.

This time around, companies have different tools at their disposal to respond to the glut. The market for freight derivatives, for instance, used by industry participants to hedge their exposure to shipping rates, didn't exist in the 1980s. To produce positive results, though, ship owners would have needed to have set a strategy in motion months before the nastiest of downturn this year, experts say.

One innovation that has gained in popularity because of the collapse in rates: indexed charters.

Most publicly traded shipping companies have their ships rented out long term, so the collapse in rates on the spot market should come into play only inasmuch as it knocks down vessel asset values on balance sheets. But most companies inked their long-term charters during the boom years, when the going rate for a Cape rocketed to more than $200,000 a day, an all-time high that some experts believe will never be seen again (adjusting for inflation). When those bull-market charters expire, companies will be forced to fix ships at a lower rate, diminishing their cash flow.

According to one company executive who didn't want to be named because he didn't have authorization to speak on the record, the going rate to hire out a ship into a long-term charter isn't as low as the spot market, which is reserved for one-off voyages. Right now, charter deals for Capes are fetching roughly $20,000 a day, this executive said, almost double the spot-market rate.

Still, that's a far cry the boom-era charters, which were bringing nearly six figures per Cape. Companies who want to avoid the spot market have thus created the indexed charter. Under these arrangements, a company receives a set daily fee. But there's also a component that ties the rate to the spot-market indexes compiled daily by the Baltic Exchange, a London-based ship broker. If the market improves, ship owners are thus able to participate in the upside, rather than locking themselves into a fixed rate over the length of the charter's term. "That doesn't change the dynamic; you've still got a lot of oversupply," says Barry Parker, the consultant. "Strategies like this are more defensive than offensive: We're talking about protecting the breakevens, keeping the banks happy, and keeping ships floating."

Ship owners have also striven to trim supply, though these moves have been driven by financial distress, not by some altruistic desire to help the industry by reducing overcapacity.

Some owners, for example, have been forced to cancel ship orders, forfeiting down payments of as much as 20% of the full price tags, which reached roughly $100 million for a new Cape during the boom. It says something about the ugliness of the present downturn that walking away from $20 million amounts to a wise financial decision. But because ship asset values of plunged, that's better than spending $100 million for a ship that will be worth $50 million the moment it hits the water.

(Cancellations don't necessarily reduce the orderbook, by the way. Most occur only after construction has begun. No shipyard will simply give up on a project. It will find a buyer somewhere, at whatever the price, which means the vessel will eventually enter service at some point.)

Then there's scrapping. In rising numbers, ships owners are sending the oldest vessels in their fleets to those squalid coasts, mostly in India, where ships are literally run aground and then broken apart and recycled for their metal, their parts, and even the fuel that remains in their tanks. Environmentally controversial, the business of scrapping has entered its own boom phase. The global price of scrap is as high as it's ever been, and the need to trim the size of world's fleets has never been graver.

Kamal Datta is a trader at Global Marketing Systems, a firm based in Cumberland, Md., that specializes in finding and selling ships for scrap. He's worked at GMS for a decade and says, "This is the busiest year I've seen for Capers."

So far in 2011, ship owners have sent between 30 and 40 Capesize vessels to the graveyard, fetching about $500 a ton on average. (The average Cape weighs about 24,000 tons -- $12 million for the owner, and a 3% commission -- $360,000 -- for the likes of Datta).

By the end of the year, Commodore Research predicts that as many as 75 Capesize ships will hit the oily beaches of one of the four major


markets: India, Bangladesh, China and Pakistan (the only countries, for obvious enough reasons, willing to allow the dirty business of ship recycling to occur on their shores). That would represent 240% growth, year-over-year. In all of 2010, just 22 Capes succumbed to the blowtorch.

In normal times, ship owners tend to look to jettison ships older than 25 years. But Datta has seen a trend: Younger craft are increasingly seen as viable scrap targets. "There were situations last year where I saw '90s-built ships going ashore," Datta says, though he's hesitant to attribute those scrappings to distressed ship owners needing to raise cash in any way possible.

"Most of the dry-bulk names are being priced for bankruptcy, and that's not going to happen," says Urs Dur, a stock analyst at

Lazard Capital Markets

in New York. Even those companies most at risk of insolvency, those with the most exposure to the collapsed spot market combined with the highest debt loads, look likely to emerge from the crisis without going under, Dur and others say.

Dahlman banker Elliott Etherege agrees. His firm recently teamed up with


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investment-banking advisory arm to offer debt-restructuring services to distressed shipping companies and their creditors. "Banks will try to work with ship owners to avoid taking aggressive actions," he says. "The banks don't want to own ships."

Still, says Etherege, companies have to mark down the value of their ships, which means they'll need to raise capital somehow in order to shore up their balance sheets. This will come from selling equity, or from taking out loans on unlevered assets. Hedge funds with experience in distressed debt deals have also shown an interest in the oceans of late. Oak Tree Capital, for example, did a deal with

General Maritime


, the tanker operator and sibling company to

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Eventually, downturns reach bottoms and cycles begin anew. When, then, can investors expect the dry-bulk shipping business to work through its epic glut? According to the latest reckonings of Lazard's Urs Dur -- which he judges to be conservative -- the industry will swing to a supply deficit by 2014. That forecast assumes growth in demand that falls below the historical average of a 6% clip per annum, Dur says, and fleet expansion that tracks along current expectations.


freight rates stay where they are, it's not only representative of oversupply but demand so poor that we're heading into massive global recession," he says. "I don't see that."

-- Written by Scott Eden in New York

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