Where Are Dry-Bulk Rates Headed?

NEW YORK (TheStreet) - Dry-bulk shipping rates tumbled in the last half of January, at one point falling to about $30,000 a day for capesize ships on the spot market.

Some attributed the fortnight of January weakening -- after what had been a healthy fourth quarter for the dry trade -- to a falloff in the price of Chinese steel. Declining steel prices give mining companies and other charterers the power to negotiate lower freight costs with ship owners.

This week, though, rates have rebounded some. According to London's Baltic Exchange, the going rate for a capesize vessel on the spot market recently was about $30,700.

Anything below $20,000 a day for a capesize vessel, the largest bulk carriers plying the oceans, and investors start to worry about whether any profit at all will fall to the bottom line of these companies -- including the five we've highlighted in our fourth-quarter look-back/first-quarter preview: DryShips(DRYS), Diana Shipping(DSX), Genco Shipping & Trading(GNK), Excel Maritime(EXM) and Navios Maritime Holdings(NM).

Divining future shipping rates is, of course, the great game of the industry. The latest trading in the derivatives called forward-freight agreements, or FFAs, indicates an average daily rate of $34,000 for capesize ships in March, $35,000 in June and $35,500 in the second quarter. (Often used as hedging instruments by ship owners and other industry insiders, FFAs are thought to signal where the smart money believes rates are headed.)

Meanwhile, many analysts are predicting average capesize rates of between $40,000 a day and $45,000 for all of 2010. That's the bulls' view. Some bearish observers think the number could go below $30,000 -- which wouldn't do much for profits and likely nothing for dry-bulk shipping stocks.