May 3 (Bloomberg) -- Shipowners led by A.P. Moeller-Maersk A/S and Nippon Yusen K.K. are using record profits and cheaper loans to finance the industry's biggest-ever expansion, raising the risk of a glut that may reduce earnings from hauling oil, coal and iron ore.

Shipyards received a record $51 billion in orders last year for tankers and dry-bulk carriers, according to London-based Clarkson Plc, the world's largest shipbroker. Prices for second- hand ships have doubled in two years, with buyers paying $29 billion last year for 1,668 vessels, Clarkson estimates.

``Money is a commodity, and there is too much of it seeking a home in shipping,'' Jan Haakon Pettersen, who runs the Oslo- based gas-tanker unit of Bergesen Worldwide Ltd., the world's largest closely held shipowner, said in an April 12 interview.

The 1,100 oil tankers and 884 dry-bulk carriers on order at shipyards are enough to swell capacity by more than 20 percent in the next three years, Clarkson said. Demand this year will probably increase 4.5 percent for dry-bulk ships and 2.8 percent for oil tankers, slowing from 2004, London-based shipbroker Simpson, Spence & Young estimates.

``Shipowners have become overzealous,'' Martin Stopford, head of research at Clarkson, said in an April 12 interview in Athens. ``It could easily turn out that the spot market doesn't generate the cash that operators need.''

Achilles Heel

Tanker rates already have plunged 70 percent from last year's record, and dry-bulk rates are down 35 percent. Daily revenue for oil tankers may drop as much as 43 percent on average in two years, said S. Magnus Fyhr, an analyst at Houston-based investment bank Jefferies & Co.

``Ordering new ships during the good times is the Achilles heel of the shipping industry,'' said Fyhr, who correctly predicted in October that shipping costs would reach the highest since 1973. ``Those very ships help bring down the freight rate once they are delivered.''

Supertankers were signed up for a record of more than $250,000 a day in November as oil producers struggled to meet fuel demand in the U.S. and Europe. Trade with China drove dry- bulk rates to a record in December, according to the Baltic Exchange in London.

Companies such as Frontline Ltd. and Teekay Shipping Corp. reported record profits, encouraging banks led by Royal Bank of Scotland Plc to loan a record $32.4 billion to Greek shipowners last year, said Theodore Petropoulos, co-managing director of Petrofin SA, an Athens-based consulting company. Citigroup Inc. and Nordea AB, the two top arrangers of loans to shipowners, cut borrowing costs to an eight-year low.

Record Prices

Shipowners used the loans, plus money raised in share sales, to bid vessel prices to record highs. Daewoo Shipbuilding & Marine Engineering Co. of South Korea, the world's second-biggest shipbuilder, said April 18 it won an order for three tankers costing a record $124 million each.

Euronav SA, based in Antwerp, Belgium, last month agreed to spend $1.5 billion on 20 tankers in four days, financing the purchases with a credit line arranged by Stockholm-based Nordea and Oslo-based DnB NOR ASA. One 2 million-barrel vessel, to be delivered in June, cost a record $142.5 million, twice as much as two years ago, brokers said.

Copenhagen-based A.P. Moeller, the world's biggest shipping company, has more than 40 tankers on order, including seven that load 2 million barrels of oil. Yusen, Japan's largest shipping company, plans to spend 1.38 trillion yen ($13 billion) in the next six years to buy and lease 278 ships, expanding its fleet of container and commodity carriers to 880.

Inflated Values

Shipping shares are below their peaks. Bermuda-based Frontline had dropped 20 percent from a March 1 record and Bahamas-based Teekay was down 23 percent since Nov. 25. D/S Norden A/S, a Copenhagen-based owner of tankers and dry-bulk ships, has declined 15 percent since April 14.

The Lloyd's List/Bloomberg index of the 50 biggest shipping companies by market value, including Frontline and A.P. Moeller, more than doubled in the two years through 2004. By comparison, the Standard & Poor's 500 index rose 39 percent.

``In some cases, we see inflated ship values and companies with inflated share prices,'' said Lars Mohangen, who helps manage the equivalent of $2.4 billion at Odin funds in Oslo. ``That's when it's time to get concerned.''

DryShips Inc., based in Athens, has spent $520 million for 10 dry-bulk vessels since February, when it sold $269 million of shares in New York. Athens-based Top Tankers Inc., whose shares began trading in July, said April 27 it paid $570 million for 15 dry-bulk ships and two tankers.

Pendulum Swings

Past shipping booms have turned into busts. Five years ago, oil-tanker rates soared as the Organization of Petroleum Exporting Countries boosted production. Rates plunged almost 90 percent by April 2002, to a 15-year low, after OPEC cut output to shore up prices.

Jonathan Chappell, shipping analyst at JPMorgan Chase & Co., remains bullish, saying on April 14 that tanker rates will be higher than previously forecast this year and next. Braemar Seascope Group Plc, a London-based shipbroker, said April 12 that rates may reach a record this year. Bergesen's Pettersen isn't so sure.

``U.S. investors often have a short history in shipping and as long as they are interested, the sky is the limit,'' he said. ``The pendulum will swing back.''

To contact the reporters on this story: Petter Narvestad in Oslo at pnarvestad@bloomberg.net; Will Kennedy in Singapore at wkennedy3@bloomberg.net.

Last Updated: May 2, 2005 19:06 EDT