Dry Bulk Hits Bottom: Anatomy of a Glut

NEW YORK ( TheStreet) -- 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 Vale ( VALE), 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.

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