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A Coming Catalyst for Dry Bulk Stocks

NEW YORK ( TheStreet) -- A recent decline in Chinese steel stockpiles could be a boon for beaten-down dry-bulk stocks.

The Baltic Dry Index, which measures commodity shipping costs, has dropped in the past few days because of a decrease in capesize rates as Chinese steel stockpiles increased in the eight weeks leading up to the beginning of October.

The increase, however, eventually outpaced domestic demand, forcing Chinese steel producers to cut production and slowing the need for iron ore. But now it tooks like a reduction in production has eliminated surplus stockpiles, meaning China could soon be firing up steel production again.

"Normally if there's a lot of momentum in the market, it's going to take a few days to really see an impact on the freight rates, but if Chinese steel stockpiles continue to decrease, China will eventually have to increase its steel production -- and that will increase their demand for iron ore," says Jeffrey Landsberg, a dry bulk industry expert at Commodore Research.

China is the single-largest global importer of iron ore, and a bump in shipments would mean more capesize business for DryShips (DRYS - Get Report), Eagle Bulk Shipping (EGLE), Excel Maritime Carriers (EXM), Genco Shipping & Trading (GNK - Get Report) and others.

The current daily rate for capesize ships is $25,298, which is off a recent high of $30,000, but still above the $20,000 rate needed to operate above costs.

Landsberg says that in early September (which he refers to as "better times") roughly 25 capesize ships were chartered each week to transport iron ore to China. Over last two weeks, however, only 11 vessels were chartered each week to haul iron ore to the country.

This trend has already started to shift.

"If you look at this week -- meaning Monday and Tuesday -- so far in the first two days of this week, nine vessels have already been chartered to haul iron ore to China," Landsberg said. "So there very well could be a light at the end of this tunnel."

Stocks in the volatile sector could use the lift. Dryships is off more than 45% so far this year; Eagle Bulk is down nearly 70%; Excel Maritime has lost more than 47%; and Genco has dropped 37%.

-- Reported by Joe Deaux in New York.

>To contact the writer, click here: Joe Deaux.

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