NEW YORK (TheStreet) -- Sentiment appears to have turned bullish among sell-side stock analysts who follow the dry-bulk shipping trade.

Iron ore is the reason.
Rio Tinto

That's because, as widely expected, the benchmark price of seaborne iron ore for the fourth quarter will probably be around 10% less than it was in the third quarter, according to indications from the big three iron ore miners, Vale (VALE), BHP Billiton ( BHP) and Rio Tinto ( RTP). That means Chinese steelmakers, emboldened by the drop, may have reason to increase their iron ore purchases during the fourth quarter, which in turn will mean a greater need for the enormous ships that move all that ore from Australia to China and from Brazil to China.

As shippers' profit-making prospects rise for the near term, so too will their stocks. At least, that's the theory.

"We believe the dry bulk shipping market could be set up for a nice surge in both charter activity and spot charter rates in the coming months," Doug Mavrinac, of Jeffries & Co., wrote in a note to clients.

Omar Nokta, of Dahlman Rose, says steel prices in China need to strengthen a bit before steelmakers there can fully "take advantage of the seaborne iron ore discount."

A rebound in bulk-freight rates would continue an overall strengthening trend in August, which follows a severe collapse in June-July, when rates on the spot market for bulker carriers, especially the iron-ore hauling Capesize vessels, plunged to levels not seen since the financial crisis.

Day rates for Capesize ships on the spot market fell to $12,000, very close to the so-called "opex" level, the point at which a ship falls below breakeven. Since then, they've risen above $30,000 a day, according to the Baltic Exchange, a London ship broker, as booking activity has improved. Further, analysts say, iron ore inventories in China appear to have fallen.

Earlier this year, the big three iron ore miners and the steel industries of Asia and Europe (the two biggest markets for the high-quality iron ore mined in Australia and Brazil and shipped across oceans) agreed to move to a quarterly pricing contract from an annual one.

The new pricing regime has led to some interesting consequences. Steelmakers, for example, unhappy by the shift to shorter-term pricing though powerless to squelch it, quickly learned how to turn things at least a bit to their advantage.

For the miners, the average selling price of iron ore on the spot market during each quarter is used to help set the contract price for the next quarter. (Rio Tinto and Vale use a three-month average, BHP a one- and two-month average.)

Cleverly, some Chinese steelmakers seem to have decided to pull out of the market for nearly a month toward the end of the third period. Demand slackened and, sure enough, iron ore prices came down. This is seen as one of the reasons that dry-bulk rates cratered as well, of course. Now, for the fourth quarter, China's steelmakers will have wrested a lesser iron-ore contract price from its iron ore suppliers.

Volatility, therefore, appears to be the new world order. And, long term, many shipping pros continue to worry about oversupply: the impact of so many new ships scheduled for delivery from shipyards to shipowners in the next year.

>>Dry Bulk Shipping Execs Air Bullish Views

Dry bulk stocks tend to move as a block, though there are differences.

DryShips ( DRYS), for example, has been bogged down by its foray into the deepwater oil-exploration equipment industry. Eagle Bulk Shipping ( EGLE), for another example, runs a fleet of Supramax-size ships, which specialize in coal and grain hauling, not iron ore. Iron ore is mostly shipped on the enormous Capesize vessels. Thus, Eagle may not participate quite like other bulkers in a rise in day rates for Capesize ships.

More than their peers, the shares of Genco Shipping & Trading ( GNK) and its new sister outfit Baltic Shipping ( BALT) track the fluctuations in spot-market freight rates.

In midday trading Monday, dry bulk stocks were mostly lower, though modestly.

DryShips was moving higher by a couple of pennies to $4.11; Diana Shipping was losing 1.5% to $11.82; and Genco was down 1.75% to $15.19.

Elsewhere, Excel Maritime was basically flat (down a penny) at $5.23, and Eagle was losing three cents to $4.66. Baltic shares were declining 2.3% to $11.24.

-- Written by Scott Eden in New York

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