OVERSUPPLY continues to haunt the world's main shipping markets, especially the large tanker sector, according to Hongkong Bank's mid-year report on the industry. The order book for larger dry-bulk carriers suggests this sector will also be highly vulnerable to oversupply unless more older ships are scrapped. In contrast, smaller ships, particularly in the dry-bulk sector, are taking advantage of the shift in trade patterns to contain the overall rate of decline. In some markets, especially Southeast Asia, they are enjoying higher freight rates, sparked by strong regional trade, according to the report. Closer co-operation between major shipping lines, coupled with higher feeder traffic growing out of strong regional economies, has brought some improvement to the container line sector. According to the report, the shipyards themselves contribute, to some extent, to the oversupply problem by displaying a remarkable ability to generate a sale by comparing present low new-building costs with the highs of the last period, which proved to be false optimism in the early '90s. ''Owners would be better advised to study the price of new-buildings compared to freight earnings over the last 10 to 15 years to judge exactly where in the cycle they now stand,'' the report says. The South Korean yards have announced they intend to expand their capacity considerably to build very large crude carriers. ''Unless the yards call for scrapping sub-standard tonnage before commencing construction, this represents a serious threat to the equilibrium of the shipping industry,'' the report warns. ''It is difficult to justify new-building in the current climate, except for genuine fleet replacement or, in the smaller vessel sector, to increase total fleet capacity gradually in line with the growth in regional trade.'' Projected growth in world trade indicates a healthier economic environment in which to operate over the rest of the decade, the report says. ''Owners should resist the attraction of a possible short-term asset-play in favour of allowing the current depressed freight earnings and high insurance costs to force older ships out of the market.'' Shipping rates, which a year ago were rising and generating optimism among shipowners, retreated to their depressed 1992 levels in almost all shipping sectors and did not bottom out until February this year. A seasonal rise since then has not proved sustainable, says the report.