China's campaign to protect its maritime industry during a severe downturn will become more costly for foreign companies as Beijing grabs a bigger slice of the profits for shipping iron ore, coal and grains to the world's second largest economy.

China's shipping sector -- led by state-owned COSCO Group -- has become one of the world's most influential with its fleet more than doubling over the last decade, matching the country's appetite for commodities and raw materials.

The global economic slowdown, however, has led to an oversupply of vessels and low freight rates, forcing Chinese shipping companies to take audacious action to support their businesses.

COSCO has demanded shipowners reduce the rental costs for their ships, while also piling on the political pressure for Beijing to stop competitors from entering the country.

Being the key import country in the dry cargo business and almost everything else, they want to throw their weight around and secure more of the business themselves, said Anders Karlsen, analyst for Nordea Markets.

COSCO, China's top maritime conglomerate, recently angered many in the freight community by unilaterally halting payments for vessels it had chartered, so it could renegotiate better terms.

In response, shipowners threatened to seize COSCO-operated vessels.

For any charterer not to pay hiring costs in an attempt to renegotiate charter rates is very bad business, said Arthur Bowring, managing director of Hong Kong Shipowners Association.

If there are people out there doing that and COSCO is one of them, I do hope it will come back to bite them.

COSCO has reached agreements with shipowners on 18 vessels and expected to reach more soon.

Greece-based DryShips Inc (DRYS.O) said the Chinese firm had resumed payments on three of its vessels, although the terms were not disclosed.

Many of the shipping contracts under renegotiation were struck during the 2008 boom when the industry's largest capesize vessels were being rented by COSCO and others for more than $100,000 a day.

The dry bulk freight market has since plummeted due to the economic downturn and an oversupply of vessels, leaving COSCO paying 2008 prices for ships that now rent for less than $25,000 a day.

VALE SHIPS

The supply glut in the dry bulk freight market is expected to continue until at least 2013, partly due to plans by Brazilian mining giant (VALE5.SA) to roll out a fleet of mega bulk carriers -- a move adamantly opposed by COSCO and Chinese shipping companies.

In an unexpected move, a Vale official told Reuters on Monday it was looking to sell or lease its planned fleet of giant dry bulk ships to Chinese and other shipowners.

Vale might be seeing the writing on the wall: sell out to China or risk damaging future iron ore sales prospects once new iron ore production projects come on stream, said Nigel Prentis, head of research, consulting & advisory, HSBC Shipping Services Ltd.

The move comes less than three months after Vale's first iron ore carrier, at 362 metres long the world's largest dry-bulk vessel, failed to gain access to Chinese ports and was forced to divert to Italy on its maiden voyage.

Market sources said the decision may make it easier for Vale to finalize negotiations with Chinese ports and win over the politically powerful shipping companies.

RESTRUCTURING

COSCO has urged its colleagues in the maritime community to be flexible with the world's largest dry bulk company as it struggles through a difficult period.

With shares of its flagship listed firm China Cosco Holdings Co Ltd (1919.HK) (601919.SS) down more than 50 percent so far this year, COSCO has decided to restructure its dry bulk freight units to cut costs and boost its bargaining power with shipowners.

A COSCO official told Reuters last week it hoped to consolidate COSCO Bulk Carrier, COSCO Hong Kong Shipping and Qingdao Ocean Shipping into one firm as soon as possible.

Our counterparts should hope for the best for us because right now we are in the restructuring process of our bulk carriers, said a COSCO official, who wished not to be named because he was not authorized to speak to the media on the subject.

In maybe one or two years, China COSCO will be stronger, more efficient and a much more reliable friend to cooperate with. All the outside parties should see this issue in this way.

COSCO had 234 self-owned and 201 chartered-in dry bulk ships with a combined capacity of 3.79 million deadweight tonnes at the end of June.

China HSBC China China