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Which Dry Bulk Shipping Stock Will Sail in 2011?

NEW YORK ( TheStreet) -- For the merchant shipping business, 2011 couldn't have started worse.

A glut of new ships and an Australian deluge have crushed the rates shipping companies charge to transport dry-bulk goods such iron ore and coal.

The latest reading from the Baltic Exchange, the London ship brokerage that tracks freight rates on the spot market globally, demonstrates the pain. On Wednesday, the going daily fee for a Capesize ship, the largest dry-bulk freighters in the world, once again ticked lower, slipping to $10,285 per day.

That's down nearly 50% from the spot-market rate just before Christmas, and down about 75% from early November, when Capesizes were averaging more than $40,000 a day on the spot market, again according to the Baltic Exchange.

The damage to shares of dry-bulk shippers hasn't been commensurate with the decline, for a variety of reasons. First, the glut that has sparked much of the rate's collapse has been widely understood for more than a year. Second, shippers generally have long-term contracts covering a majority of the ships in their fleets. Thus, they're insulated to some degree from short-term volatility in spot-market rates.

Still, according to the futures market that has grown up around merchant shipping -- derivatives used by seaborne carriers to hedge against drops in rates -- the dry bulk market is likely to rebound within a month or so. The average Capesize fee per day in the second quarter is expected to be more than $20,000, according to the market for these derivatives, called Forward Freight Assessments, or FFAs.

Of course, forecasts based on FFAs have been wrong before. Back in November, trading in the derivatives suggested that the smart money in the shipping industry was expecting Capes to average close to $30,000 a day in the first quarter. That's not going to happen.

So what's in store for dry-bulk stocks in 2011? The shares trade together, for the most part, but enough differences between companies exist to make them diverge a bit from time to time.

DryShips (DRYS), for example, which boasts the largest market cap in the sector, has morphed into an operator of energy-exploration rigs. It also recently acquired a dozen oil-tanker newbuildings -- or ships on order and still being constructed at shipyards. The company plans to sell these fleets off in IPOs.

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