Shipping industry has been a wreck due to oversupply of ships but now the looming financial crisis that is being triggered by the Euro banks may inflict a fatal injury to many shippers, say bankers who finance the shippers.

“The typical shipping banks are deleveraging, are recapitalizing. They have problems in long-term dollar funding and most of shipping is in long-term dollars,” says Joep Gorgels, head of transportation, West Europe, at ABN AMRO

Tough financing, expected to last for 2 more years, may force asset sales and seizures says this banker.

The pricing problem caused by the glut of ships is now exacerbated by Vale’s entrance into the shipping business promising to cut 20-25% in freight costs.

Last month, Vale introduced the 400,000 ton ship that promises to drop iron ore shipping charge from the current $21-22 down to $17-18 per ton. Called Valemax, this is the first in many ships that Vale plans to build over the years in a push to sidestep independent freighters and be more competitive in shipping ore to China.

Says Vale’s global marketing director Pedro Gutemberg:

“Today we have got the best possible (market) situation with high iron ore prices and low freight rates but we want to be ready for when the market turns.”

Additional 100 vessels are scheduled to enter the market in 2011-14 period and all these ships are expected to keep the freight rates low for a long time.

Are competitors looking to respond to Vale’s vertical integration tactic by introducing their own vessels? Could shippers, in the long run, end up being just a service appendix to the big ore producers?

Dry Ships (DRYS) is case in point: it tumbled from $85 to $3 and change and with no pricing power DRYS and many others look like dead money.