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Lower Iron Ore Prices: Good for Dry Bulk?

Stocks in this article: DRYS DSX GNK BALT EXM EGLE

NEW YORK ( TheStreet) -- Sentiment appears to have turned bullish among sell-side stock analysts who follow the dry-bulk shipping trade.

Iron ore is the reason.

Rio Tinto

That's because, as widely expected, the benchmark price of seaborne iron ore for the fourth quarter will probably be around 10% less than it was in the third quarter, according to indications from the big three iron ore miners, Vale (VALE), BHP Billiton (BHP) and Rio Tinto (RTP). That means Chinese steelmakers, emboldened by the drop, may have reason to increase their iron ore purchases during the fourth quarter, which in turn will mean a greater need for the enormous ships that move all that ore from Australia to China and from Brazil to China.

As shippers' profit-making prospects rise for the near term, so too will their stocks. At least, that's the theory.

"We believe the dry bulk shipping market could be set up for a nice surge in both charter activity and spot charter rates in the coming months," Doug Mavrinac, of Jeffries & Co., wrote in a note to clients.

Omar Nokta, of Dahlman Rose, says steel prices in China need to strengthen a bit before steelmakers there can fully "take advantage of the seaborne iron ore discount."

A rebound in bulk-freight rates would continue an overall strengthening trend in August, which follows a severe collapse in June-July, when rates on the spot market for bulker carriers, especially the iron-ore hauling Capesize vessels, plunged to levels not seen since the financial crisis.

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