DRY BULK DOWN ON UNCERTAINTY OVER IRON ORE
With an iron ore port closing outside Rio de Janeiro and increasing uncertainty around upcoming iron ore negotiations, the demand for dry bulk ships, as well as charter rates, have fallen.
Last week, Companhia Vale do Rio Doce (nyse: RIO - news - people ) announced that Itaguai maritime terminal in Rio de Janeiro would close for a few weeks for reconstruction due to an accident in December.
The closing will result in an average daily loss shipment of 60,000 metric tons of iron ore, the company said. Jefferies & Co. analyst Douglas J. Mavrinac said that the timing of the port closing is favorable to the miners because of the upcoming iron ore negotiations. ''By not having the volumes on the water it has caused the spot price of iron to increase and created a tighter market which benefits the miners when it comes to negotiation,'' Mavrinac said.
Itaguai has an annual shipload capacity of 25 million metric tons of iron ore and is Vale's smallest maritime terminal dedicated to iron ore shipments, according to the company.
The combination of the port closing and the stagnant iron ore price negotiations have damaged shipowner confidence and reduced spot activity, said Dahlman Rose analyst Omar Nokta. As the spot market declined last week the futures market followed suit.
The average forward rate for 2008 is approximately $103,000 per day, down nearly 25% from two weeks ago, said Nokta, as long term charter contracts that sustained shippers throughout much of 2007 have been noticeably absent in the new year.
''This has contributed to the nervousness and secondhand vessel values may see some pressure if longer-term time charter demand remains quiet,'' Nokta said. Nokta said that concerns about a recession in the United States have caused investors to sell off almost all their dry bulk stocks in the new year even though steel and coal prices have remained steady, which means demand is strong. Meanwhile, Maxim Group analyst Charles Rupinski said that a lot of ships arent getting hired because of the upcmoing iron ore negotiations because companies want to know how much the iron is going to cost before hiring the ship.
If iron ore prices are raised, Rupinski expects that a lot more ships will be hired. In the meantime, China has taken a hard stance against Australian iron producers threatening to slow down production and draw down inventories in order to scare the producers into not raising iron ore prices. But Rupinski says that China only has two to three weeks worth of ore inventory left and with an increase of steel production year over year, China needs Australia's ore.
With iron ore 25% of all dry bulk trade, China's posturing has a large impact on the dry bulk shippers. Analysts and industry observers say that China can't go without ore for any sustained length of time becasue steel rpices are still very strong on the world market because of the high pace of infrastructure development in emerging countries.
DryShips (nasdaq: DRYS - news - people ) has been hit particularly hard because it has the largest number of Capesize vessels--the largest ships and the most spot exposure.
DryShips shares fell 1.1%, or 69 cents, to $60.58 inafternoon trading, while Diana Shipping (nyse: DSX - news - people ) slipped 0.9%, or 21 cents, to $24.80. Quintana Maritime (nasdaq: QMAR - news - people ) slid 3.8%, or 85 cents, to $21.74. FreeSeas (nasdaq: FREE - news - people ) tumbled 3.5%, or 21 cents, to $5.77.
Even with a slowdown in the global economy Rupinski said that dry bulk shippers are still in a position to weather the storm, especially with fleet additions at a minimum in 2008.