Shipping and steel industry officials say there is a global shortage of ships as iron ore, used for making crude steel, is again moving to China at a rate of more than 200 million tonnes a year, up by about 50 million tonnes from 2003.

The Baltic Dry Index, a benchmark for cargo freight rates, climbed to 5,626 on Wednesday, edging close to the all-time high of 5,681 on February 4.

The index has rebounded strongly since October after shrinking to 2,622 on June 22 following Beijing's credit tightening.

``I don't see major changes in the balance of supply and demand through the first quarter or rather throughout next year,'' Mitsui OSK Lines' Masafumi Yasuoka said.

``New vessels are coming into the market, but China plans to buy even more iron ore next year,'' the general manager at Mitsui's coal and iron ore carrier division said.

Even grain traders worry about China's steel industry as rising freight rates could account for a quarter of the costs of soyabean or wheat trade, potentially breaking deals.

To shift the extra 50 million tonnes of ore, Yasuoka calculates the world needs 42 additional capesize ships, the largest vessels for dry cargoes with an average capacity of about 170,000 tonnes. Only 35-40 new ships were added to the global fleet this year and the same number are due to be added next year. High freight rates are also keeping some ageing vessels from being sent to the scrapyard.

The quantitative change in China's iron ore imports dwarfs fluctuations in trade of any other commodity, including soyabeans. China, the world's top importer, bought 15.52 million tonnes in the first 10 months, down 15.6 per cent on a year earlier.

``They're talking about power shortages and transport problems in China,'' said Hiotoshi Ito, general manager of the Japan Iron and Steel Federation's Beijing office. ``But crude steel output is still growing. It hit yet another monthly record in October. There's a global steel shortage. So the Chinese are not just making for themselves, but are exporting steel products, such as bars and hot coils,'' he said.

Japan's Nissan Motor said it would halt production at some plants for five days in the coming weeks due to a shortage of steel as mills struggle to meet demand.

Data compiled by the International Iron and Steel Institute showed China's crude steel output reached 24.94 million tonnes in October, up 25.3 per cent from the same month last year.

The China Iron and Steel Association's Luo Bingsheng told the China Business Daily the mainland's 2004 steel product exports were rising to 12 million tonnes, up 72 per cent, as international prices were US$100 (HK$780) a tonne higher than domestic levels.

Exports of steel products are likely to grow further next year, when China's total output of steel products is forecast to top 300 million tonnes after rising 14-15 per cent to 265 million tonnes this year, the newspaper said last week.

With huge amounts of iron ore being shipped not only to China but also to Japan and South Korea, which have cranked up steel production to meet mainland demand, ports are becoming congested, adding to a shortage in seaborne transport, officials said.

``Unless China takes some macro measures as they did earlier, the freight market is expected to be very strong in January or the first quarter,'' a senior official at an international commodities and shipping company said.

REUTERS