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Amid Glut, Where Will Dry Bulk Rates Go?

Stocks in this article: DRYSEXMEGLENM

(Dry-bulk shipping poll updated with details from a research note on Eagle Bulk Shipping.(

NEW YORK ( TheStreet) -- Already, a major dry-bulk shipping concern has succumbed to this month's epic collapse in the rates charged to haul raw materials around the world.

That company, a South Korean freighter called Korea Line Corp., filed for receivership Tuesday and sparked concerns of a kind of domino effect. Eagle Bulk Shipping (EGLE), for instance, has chartered more than a dozen ships (out of its fleet of 48) to KLC. The status of those long-term charters (six to ten years in duration) is now up in the air, though the company has called its exposure "modest."

On Wednesday, FBR Capital Markets upgraded Eagle Bulk shares, saying that the selloff in the company's stock in the previous session, when it lost 11% of its value, was "overdone." Channel checks showed that the KLC bankruptcy won't have a "material negative impact" on Eagle's financials, FBR said.

>>Working Through the Glut: Dry Bulk 2011

How bad has the dry-bulk market become? A London-based ship brokerage called the Baltic Exchange, which tracks global shipping rates on the spot market, says that the going day rate for a capesize vessel, the largest dry bulkers in the world, has plunged to $8,000 as of Tuesday, very close to the so-called opex level for that class of freighter. That is, it costs between $7,000 and $10,000 per day to operate a capesize ship. Any vessel hired out on the spot market will, therefore, be a losing proposition for shipowners.

Just two months ago, in November, the going rate was $40,000 a day.

Dry-bulk stocks rallied a bit Wednesday after taking it on the chin during Tuesday's session. Eagle Bulk Shipping was the headliner. Its shares gained 3% after the sharp drop on super-heavy volume a day earlier.

Genco Shipping & Trading (GNK), which was downgraded by Deutsche Bank on Tuesday, gained back about 3% after a precipitous drop the day before.

Other big losers from the previous session were in the green Wednesday. TBS International (TBSI) rose about 5%; Navios Maritime (NM) gained about the same; Excel Maritime (EXM) was up about 4.5%; and DryShips (DRYS), which has its own unique set of risks, added 3%.

The reasons behind the collapse in dry-bulk day rates are well known. First and foremost: oversupply. Hundreds of ships were ordered by rich shipping magnates during the last upcycle, the boom years between 2006 and 2008.

Those ships are now gliding down ramps at the major shipyards in Asia, gleaming and ready for service. More ships were ordered at the time than there were ships on the water. The binge focused on capesize ships, which specialize in carrying iron ore on some of the most lucrative routes in the world (Australia to China, Brazil to China).

True, ship owners have taken countermeasures. They're taking portions of their fleets temporarily out of service. They're selling older vessels for scrap and sending them to the ship breakers. They're delaying or even canceling orders. In 2010, 20% of the total dry-bulk "orderbook" underwent cancellation and "slippage," to use the industry argot. Still, the worldwide fleet increased last year by 17%, according to some estimates.

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