With the cost of shipping by sea down as much as 95% from three years ago, freight companies such as Frontline Ltd (FRO, quote), DHT Holdings (DHT, quote), Dry Ships (DRYS, quote) and others are facing major problems from the supply of available vessels on the market.
Even more dangerous for those companies is China’s goal of dominating the market.
China’s plan — set out in a 2007 Communist party decree – is to require up to 75% of its import and export trade by sea to be carried on Chinese vessels.
Given its status as both the world’s largest manufacturer and the largest importer of raw materials, China has tremendous power to set prices. The fact that much of the global shipping trade involves moving iron ore from Australia or Brazil to China only adds to its power.
As a result of this market dominance by China, shipping rates have fallen drastically. Charter rates for iron ore from Australia to China, at $234,000 a day in June 2008, are now down to $11,314.
With government backing, Chinese shippers can absorb these rates. This is not so for others, which is aptly reflected in the stock price of these companies.
Now around $5.80 a share, the high for the year for Frontline Ltd was $28.52. Once at $28.37, the Guggenheim Shipping ETF (SEA, quote) is trading for less than $16.