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Dry Bulk 2011: Working Through the Glut

Stocks in this article: DRYS DSX EXM GNK

Then, just last week, the cliff head was reached. The going charter price for a Capesize vessel on the spot market plunged by 50% over the space of a few days, as judged by the Baltic Exchange, a London ship broker that tracks maritime freight rates. The going rate as of Tuesday, Jan. 11, was less than $12,000 a day -- very close to the amount it takes to operate a Capesize ship, and the lowest since early 2009, in the midst of the financial crisis.

It was as if a switch had been flipped. Of course, epochal floods in Australia's Queensland state have disrupted mining in one of the world's most prolific coal fields, which has hurt the dry-bulk trade at large. But coal is mostly carried by smaller Panamax and Supramax ships, not Capes. Indeed, the glut in the latter class of vessel has been so strong that Capes are now the cheapest dry bulk carriers to rent on the spot market except one: the Handysize, which are one-tenth as big as Capes.

Another 200 Capes are scheduled for delivery across the year -- which isn't good, not by any means. Still, most publicly traded dry-cargo shipping companies have insulated themselves to some degree from the fluctuations of the spot market, having locked their fleets into long-term contracts with raw materials suppliers. Thus, the spot-market plunge won't ruin profits at most companies.

Owners also have taken countermeasures. They're removing ships from service, either mothballing them or selling the oldest ones for scrap. But no one believes that scrapping alone will cull the fleet enough to assuage the impact of all those new ships. "Rates are going to be under pressure all year," says Commodore Research analyst Landsberg. "I'm not optimistic."

Still, as far as share prices go for 2011, encouraging signs do exist. For one thing, some industry watchers say, dry bulk stocks-- though they've certainly performed poorly -- have held relatively steady in the face of the collapse in freight rates. Even the company with the fleet most exposed to spot rates -- Genco Shipping & Trading -- has seen its stock hang above $14 since the bad news began late last year.

Some of the effects of the glut, in other words, have already been priced into dry-bulk stocks.

Further, the latest trading in the derivatives called Forward Freight Assessments, or FFAs, indicates that Capesize day rates will average $21,000 in the second quarter of the year. Once again, that's not good. But rates that double from here could give a bit of a lift to stocks in the sector.

But what of the individual dry-bulk companies themselves -- and their stocks? And what of their fate in the coming year? Click on for the outlook for dry-bulk shippers in 2011...

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