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TheStreet Open House

What's the Best-Case Scenario for Dry Bulk?

NEW YORK ( TheStreet) -- The world's most formidable steel industry and the world's biggest miners of iron ore are once again embroiled in their yearly pricing negotiations.

This time around, the outcome could bring a sea change to the iron-ore business. At issue is the very nature of the trade, with the big three iron ore miners angling to do away with the annual-pricing regime that has structured the business for the last 40 years.

Within the last year or so, more and more of the world's iron ore trade has moved from the annual-contract system to the spot market, a more lucrative model for miners. Steelmakers, on the other hand, despise the spot market's volatility. In the end, the most likely outcome would appear to be a compromise quarterly-contract system.

Some might even suggest that as pricing talks have dragged on between the miners and their iron-ore customers in China, both sides have been trying to influence the iron-ore spot market to gain leverage -- or, at least, the evidence, plus a cynical worldview, suggests that this might be so. "In any negotiation, there's gamesmanship that goes on on both sides," said one stock analyst. "So why would that not be happening right now?"

Perhaps miners are hesitating to put iron ore onto the market in an attempt to drive spot prices higher. Perhaps China is purposefully hesitating to book iron-ore cargoes out of places such as Australia and Brazil in a bid to weaken prices on the spot market.

Indeed, a pattern has developed: During the period of price-negotiation tension between miners and Chinese steelmakers, China goes to India for more of its ore. This increases the supply of available ships on the market, since the India-to-China route is far shorter than the Brazil-to-China route.

It also increases the supply of available capesize ships relative to smaller vessels, since India's ports are generally too small to handle capesizes -- the largest bulk carriers on the seas, and thus the world's iron-ore transporter of choice.

Since last week, the going rate for a cargo on a capesize ship was less than that of a much smaller panamax-size vessel. According to the Baltic Exchange, the London ship broker, capesize day rates were about $28,500 on Monday, compared with $30,600 for a panamax. This marks the first time since late 2008 -- when the global financial system and the maritime freight market both collapsed -- that capesize day rates have been cheaper than those for a panamax.

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