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Tickers in this Article: DSX, DRYS, GNK, EGLE, PRGN
After being stuck in the doldrums of a sideways trading pattern since mid-summer, dry-bulk shipping companies' shares put on a dramatic show of strength recently that could signal the long-awaited breakout for this group. Operators like Eagle Bulk Shipping (Nasdaq: EGLE), Diana Shipping (NYSE: DSX) and Genco (NYSE: GNK) all tacked on double-digit, one-day gains on record trading volumes. IN PICTURES: How To Make Your First $1 Million

China's Economy On A Tear
This price and trading explosion was triggered by news that the Chinese economy, whose appetite for commodities keeps these bulk carrier fleets busy hauling raw materials eastward, continues to grow at a record pace despite continued sluggishness elsewhere in the global economy. Chinese industrial output surged by more than 16 percent during October - a rate not seen since the pre-recession boom levels recorded in March 2008. While exports continued to undershoot expectations, domestic consumption continues to move ahead at a rapid pace due to effects of the government's stimulus spending.

Now that Chinese consumers appear to be developing a taste for Western-style consumption, which has raised demand for big-ticket items like appliances and cars, China's steel mills are operating at a near-record pace. That, in turn, has pushed up demand for iron ore, imports of which are up 50% on a year-over-year basis.

Spot Shipping Rates Up Sharply
This is great news for the bulk shippers, whose massive ore carriers have seen a healthy improvement in day lease rates to about $67,000; roughly double the going rate of just two months ago. Tracked by the Baltic Dry Index, average day rates are almost back to the near-term peak levels achieved last June, which also marked the last peak in shippers' share prices. But they are still significantly below the levels achieved last summer. The upside potential implied by this number no doubt contributed to the explosive nature of the recent share rally. (To learn more about the Baltic Dry Index, see The Baltic Dry Index: Evaluating An Economic Recovery.)

But Most Shippers Won't Benefit From Rate Jump
These bullish expectations need to be tempered by a couple of facts. First, the current jump in spot rates is likely to have a limited near-term impact on most dry shippers' bottom lines. Betting that day rates would remain depressed for quite awhile, many shippers chose to lock in much of their capacity at long-term charter rates. The need to renegotiate terms with nervous lenders demanding greater stability in revenues and earnings was another factor pushing operators to opt for long-term charters. DryShips' (Nasdaq: DRYS) recent debt restructuring is just one example of this.

Consevative operators like Paragon Shipping (Nasdaq: PRGN) now have 100 percent of their fleet locked into long-term charters, while even more aggressive ones like Genco, which currently sports the highest spot market exposure in the industry, still only has about 25 percent of its fleet free to take advantage of the recent uptick in day rates. As a result of opting for the more-secure returns inherent in long-term charters, third-quarter results for the group met or just slightly exceeded analyst expectations. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Future Fleet Additions Should Keep Rates In Check
Looking ahead into 2010 and beyond, the massive overhang of new bulk carriers entering the fleet will likely keep a lid on spot rates for years to come. In a recent study, veteran shipping industry watcher Lloyd's Register predicts that the world's bulk fleet will grow by a 9.5 percent annual average through the end of 2013, up from 6.5 percent annual average growth the previous five years.

The Bottom Line
Momentum alone will probably push most dry shippers' shares back to their mid-summer levels. Progress beyond that point will depend on evidence that the industry is prepared to cancel those new ship orders that threaten to cause a multi-year supply glut.

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