April 30 (Bloomberg) -- The cost of shipping coal and iron ore is about to decline as the supply of cargo vessels overwhelms demand.

Japan, China and South Korea will produce so many vessels that shipping costs, now at an all-time high, will fall 40 percent by 2010, according to futures contracts traded privately between banks, transportation companies and hedge funds. The decline would hurt Antwerp-based Compagnie Maritime Belge SA, the world's largest commodities-shipping line, and Golden Ocean Group Ltd., run by Norwegian billionaire John Fredriksen.

``We're going to see the largest deliveries to the fleet that's ever been recorded,'' said Philip Rogers, 58, head of research at Galbraith's Ltd., the London-based shipbroker, who's been assessing freight markets for 30 years.

Chinese shipyards are building enough carriers to haul 48 million tons in the next five years, equal to 15 percent of the nation's annual iron-ore imports, according to Galbraith's. The new ships are 26 percent bigger than the merchant fleet produced by the U.S. after the bombing of Pearl Harbor in 1941.

Lower costs may benefit China's Baoshan Iron & Steel Co., Arcelor Mittal of Luxembourg, the world's biggest steel producer, and other companies that hire ships to carry grains, coal, ore and similar goods.

Commodity-shipping rates have soared 41 percent this year, climbing to a record 6,248 points today on the Baltic Exchange, a 263-year-old institution that traces its roots to a London coffee house.

Bearish Hedge Funds

Clarkson Plc, the world's largest shipbroker, and hedge funds M2M Management Ltd., headed by a former chartering executive at BHP Billiton Ltd., and Castalia Fund Management U.K. are already anticipating a drop in costs.

``It has to fall,'' said Steve Rodley, joint managing director at M2M Management in London. ``It's hard to see rates sustaining where they are today beyond the summer.''

Rates may begin to decline next month, when cargo vessels become available as port officials in Newcastle, Australia, clear one of the worst-ever traffic jams. A revival in iron ore trade between India and China will reduce the length of voyages and free more freighters.

The cost of renting the biggest ships, known as capesize carriers, climbed 73 percent in six months to a record $106,366 a day today, enabling owners to pay for a $78 million ship in a little more than two years.

Diana Shipping Inc., which paid a record $110 million for a capesize carrier in March, agreed to daily rental rates for the ship of $52,000 every day for more than four years from BHP Billiton, the world's biggest mining company. Diana will earn sales of at least $75 million. BHP Billiton has an option to extend the contract for 13 more months.

Futures Contracts

Futures contracts, called Forward Freight Agreements, are traded privately and cleared by Imarex NOS ASA in Oslo and LCH Clearnet in London. They signal rates will decline to $42,200 by 2009, the biggest drop since 2001.

A record 74 vessels are stuck off Newcastle, the world's largest coal port, waiting for congestion at the terminal to clear and a chance to load. The delays began last year after the terminal scrapped a quota system that restricted when shippers could take on cargoes.

The quota was reinstated this month, and delays will start to ease around mid-May, said Vivek Srivastava, an analyst at Maritime Strategies International Ltd. in London.

`Come Down Fast'

India may add to the supply of vessels. The country is considering revising a plan to impose a tax on iron-ore imports, Hindu Business Line reported April 26. The original proposal prompted Chinese steelmakers to boycott iron ore from India last month in favor of countries as far away as Brazil, tying up vessels on longer trips. Iron ore makes up about 25 percent of global bulk freight.

``When fleet utilization reaches 92 to 93 percent, you see rates going up exponentially,'' said Torstein Bomann-Larsen, a freight-derivatives broker at Imarex NOS ASA in Oslo. ``And fleet utilization is 97 to 98 percent, so it's extreme. If congestion eases by 20 percent, rates could come down fast.''

Chinese shipbuilders had more customers for commodity carriers than those in Japan in the first quarter, according to Clarkson. Shipyards in China attracted orders for 98 vessels with a combined carrying capacity of 8.7 million tons.

``The Chinese have added the equivalent steelmaking capacity of Japan and Korea in five years, and that can't continue,'' said Martin Stopford, 59, head of research at Clarkson. ``It leaves you with a problem if and when steel slows down.''

`Very Good Years'

Steel demand is being buoyed by China's economy and may not slacken anytime soon, said Andreas Vergottis, who helps manage $750 million at London-based Tufton Oceanic Ltd., the world's biggest shipping hedge fund. Tufton may spend $200 million to buy vessels for the first time.

``We are going to have three very good years,'' Vergottis said. ``This year will be better than 2006, 2008 will be better than 2007, and 2009 will be even better.''

Tufton is bullish because China is both the largest shipbuilder and consumer of commodities. The economy grew 11.1 percent in the first quarter, driving demand for iron ore. China also became a net coal buyer for the first time this year, while rising incomes and a shortage of farmland may spur increased imports of grain to feed livestock.

China launched vessels capable of carrying 14.5 million deadweight tons last year, about a fifth of the world's total orders and 20 percent more than in 2005, the state-run Xinhua News Agency reported Jan. 31.

The production rivals the U.S. Navy in WWII, when 18 shipyards built 2,751 standard Liberty freighters after Pearl Harbor, with a total displacement of 39 million tons, according to the U.S. Merchant Marine's Web site.

The Jiangnan Changxing shipyard, located on an island near Shanghai, has orders for 49 bulk carriers, tankers and container ships, according to Clarkson. The combined length of the vessels is seven times that of New York's George Washington Bridge.

To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net.

Last Updated: April 30, 2007 09:49 EDT