Piracy of all sorts goes hand in hand with shipping. Mainstream media, ranging from Time Magazine, and the New York Times, without oil-spills to cover, are now concentrating on events off the coast of Somalia. Closer to home and to my political sentiments, the Wall Street Journal has had some sensible ideas, as have the Huffington Post’s Mr. Keith Thomson, who wrote an excellent piece about the possible role of private security forces.

Lately, we’ve seen the drybulk market victimized, and held hostage, by a different type of pirate- the huge industrial company. Fortescue Metals Group (FMG), in Australia, is the secret weapon of Chinese steel mills who love to hate FMG’s bigger rivals. Indeed Fortescue recently hooked up, through some type of alliance, with a big Chinese mill- Hunan Valin (not “Vale”). The Chinese are finally saying “no” to those high freight rates of late 2007 and mid 2008, with FMG the instrumentality of canceling multi-year time charters. FMG moves roughly 18 million tons of ore/ year on vessels; a lot (I don’t know how much) goes into China. But, to keep that flow going, terms will shift over to FOB at Port Hedland (where FMG’s Pilbara ore is loaded)- meaning that customers will charter ships rather than buying delivered under FMG’s freight contracts.

Other piracy has come from the huge steel-maker Accelor Mittal, which is reportedly embroiled in tiffs with at least three big ship operators- Zodiac, Swiss Marine, and Dreyfus. In each case, shipments of intermediate or finished steel products, under contracts of affreightment, were cancelled.

Many of the FMG contracts are secret, but the take away is that the work out to levels way above the current freight cost. I did find a few FMG period charters in data bases- Capesizes done on five year deals at $75,000 / day and $85,000 / day in late 2007 and Spring 2008, by well known Danish and Greek owners. Current Capesize rates have slid to between $5,000/ day to $10,000/day.

For these situations, the companies will negotiate a settlement, or not- more likely, the charter contracts entered into by FMG and Accelor Mittal will wind up in court (this is way beyond the grist for maritime arbitrations). It’s not for me to speculate on the outcome, although folks who know me can tell you the I always root for the little guy. Strange twist of fate where Dreyfus is the little guy in the whacky calculus of bdp1 Consulting Ltd?

For serious students of politico-economics (disclaimer- I am an amateur, the Council of Foreign Relations folks enjoy their dialogues with me, but that’s as far as it goes), the whole China iron ore conundrum is a new paradigm still being written. I have suggested, quite seriously, that the entire drybulk industry is being held hostage while China gets the price of ore down to where they want it. After forcing their big customer to pay through the nose last year, Vale (not “Valin”) has basically been cut off as shipments languish. Now the Chinese have their own “fighting ship” in the form of FMG, to knock down the landed prices of ore into China (even though BHP seems to have been doing a clutch of spot charters into China- albeit at low spot shipping prices and I am inferring at depressed spot ore prices). Remember that whole controversy earlier this year about “landed freight cost” parity? Of Australian ore with Brazilian ore being sold into China. What a dim memory that needs to be dulled. Parity has now been achieved, and then some, by pirates walking away from freight contracts that everyone thought were solid. Maybe those crazy ideas from Imarex/ NOS Clearing about credit guarantees for physical market deals are not so crazy after all? Shipping bankers, are you reading this?

For this of you interested in how container and tanker markets could be helped by anti-piracy measures, the following are excerpts from my communications with Huffington’s blogger Keith Thomson.