NEW YORK (TheStreet) -- The going rate for some of the biggest cargo ships in the world -- the so-called Capesize vessels charged for the most part with hauling iron ore to China -- spent most of 2010 in a muted, depressed range, a situation that most industry players attributed to a revolution in the way iron ore is bought, with dry-bulk shippers caught in the middle.

And then suddenly, over the last several days, Capesize rates have surged.

According to the Baltic Exchange, a London ship broker that tracks the nautical freight business, the day rate on the spot market for these giant vessels went from about $26,000 at the start of last week to more than $38,000 on Wednesday -- a jump of almost 50%.

Dry-bulk stocks, meanwhile, have for the most part fluctuated along with the broader market. Shares of DryShips ( DRYS), for example, which has had its own issues with equity dilution, are basically flat with where they were last week, trading on Wednesday midday at $6. DryShips also has no exposure to the spot market, having locked 100% of its fleet into long-term charter contracts. Genko Shipping & Trading ( GNK), on the other hand, with 30% of its fleet on the spot market -- rather high for the publicly traded segment of the industry -- has seen its share price gain nearly 4% on Wednesday.

For Capesize ships, such volatile rate gyrations aren't unheard of, since the bigger the ship, the more prone their spot rates are to such swings. The same holds true for Very Large Crude Carriers, which have also experience a significant rally of late.

And, yet, it appears as though fundamentals of supply-demand have at least momentarily swung in favor of ship owners, who each day enter into a kind of battle with the other side: the commodities traders or industrial raw materials consumers who need to put the cargo on a boat and bring it home. The battle is refereed by ship brokers, the middlemen inside offices in London or Hong Kong. With phones shouldered to their ears eight hours a day, the brokers talk with owners on one line and the ship hirers on the other, dickering and haggling, playing it cool or going aggressive, as the situation warrants.

On Monday alone, the Capesize rate on the spot market jumped 20%.
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Some have called this huge swing a return to the "natural order," as Credit Suisse ( CS) analyst Greg Lewis described it. For the last month or so, the iron-ore pricing upheaval had inverted that natural order. Though the matter is far from clear, the world's biggest miners -- Vale ( VALE), BHP Billiton ( BHP), and Rio Tinto ( RTP) -- appear to have pressed the worldwide steel industry into accepting a short-term pricing system based on spot prices.

In an attempt to gain bargaining leverage, the Chinese may have redirected some of its iron ore buying away from Brazil and Australia and toward India, where the ports are smaller and can only accommodate Panamax ships. Thus, the theory goes, Capesize rates fell as activity on the routes between Australia and China and Brazil and China fell off sharply. So sharply did they fall of that, for some time, it was cheaper to hire a Capesize than a much smaller Panamax.

Now, a Capesize is 1.2 times more expensive than a Panamax. That's still short of the historical average ratio of 1.9, however, which suggests that Capesize rates have more to go.

What's surprising is that the balance of power has -- at least for the moment -- shifted to the ship owners. That's because an enormous number of vessels now on order at shipyards are scheduled to come into service this year and next.

Fears of a coming glut have consumed the industry, and for good reason. In the first quarter of 2010, 47 new Capesize ships were delivered -- more than were delivered, of example, in all of 2008. (Last year saw a huge upsurge in deliveries, the beginning of the oversupply trend.)

Indeed, the expansion of the overall worldwide Capesize fleet in the first quarter also contributed to the weakness in rates earlier this year.

Now, though, demand appears to have caught up with that supply. "Chinese steel production has been off the charts," said Jeffrey Landsberg, a shipping-industry consultant who watches the dry-bulk trade. In March, for example, China's steel industry set yet another monthly production record. Finally, he said, that steadily brisk demand has started to absorb supply.

Indeed, port congestion has suddenly created bottlenecks. In Brazil, for instance, 60 ships are currently at anchor waiting to load up with iron ore. That's the biggest number since September 2008. Congestion is also rising at ore ports in Australia.

So what does all this mean for dry-bulk stocks, which tend to lag moves in freight rates?

Though demand will remain brisk because of China, oversupply will continue to cast a shadow over the industry, cautioned Credit Suisses's Greg Lewis in a research note.

Counter-intuitively, rising rates could even be cause for longer-term alarm, because firmer rates could dissuade ship owners from canceling or delaying their new vessels. Why spike an order if it looks like you can make some good money on a new ship? But if too many owners think the same way, too little of the orderbook will be canceled, and oversupply will loom once again.

Just last week, fixed-income analysts at Goldman Sachs advised investors in a 40-odd page report to prefer the bonds of tanker companies to those of dry bulk. Why? Essentially the reason described above. Ship owners will find plenty of funding for their new orders from banks and other sources entranced with firm freight rates.

"In our view, if most market observers were bearish on Chinese iron ore imports (for example), then perhaps some shipping companies would not be as motivated to compete construction of their vessels," the Goldman analysts wrote. "But the better demand picture, the better the investment thesis that companies will be able to present to their boards and their banks, and the more capital will move to shipping in order to participate in this rosy market."

In the end, then, "we think the dry bulk orderbook should far overwhelm" an increase in dry bulk demand in 2010, keeping rates capped -- and, presumably, stock prices.

Around the dry-bulk equities world Wednesday, stock prices were mixed. DryShips was falling 1.3% to $5.87, Diana Shipping ( DSX) was gaining 0.3% to $15.60, Genco was up 2.8% to $23.49, while the all-spot-market Baltic Trading ( BALT), which Genco founder Peter Georgiopoulos took public last month, was falling 0.8% to $14.01.

Elsewhere, Navios Maritime Holdings ( NM) was down 4% to $6.93 and Eagle Bulk ( EGLE) was losing 1.3% to $5.47. Excel Martime ( EXM) was in positive territory, gaining 1.3% to $6.89. -- Reported by Scott Eden in New York

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Scott Eden has covered business -- both large and small -- for more than a decade. Prior to joining TheStreet.com, he worked as a features reporter for Dealmaker and Trader Monthly magazines. Before that, he wrote for the Chicago Reader, that city's weekly paper. Early in his career, he was a staff reporter at the Dow Jones News Service. His reporting has appeared in The Wall Street Journal, Men's Journal, the St. Petersburg (Fla.) Times, and the Believer magazine, among other publications. He's also the author of Touchdown Jesus (Simon & Schuster, 2005), a nonfiction book about Notre Dame football fans and the business and politics of big-time college sports. He has degrees from Notre Dame and Washington University in St. Louis.

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