smooth seas ahead for shippers

since the beginning of the year, dry-bulk shipping stocks have risen, in general. kind of bumpy at times, but most are up nicely. i think things stand to get much better in due time.

why, when things are up so much, can they stand to go even higher? there are three reasons: coal, the earthquake in china and the credit crunch.

first, a quick review of how things got to this point.

the most-followed stocks in the sector have followed the roller-coaster ride in the cost of freight rates. last november the Baltic Dry Index, which measures the cost of moving bulk commodities such as ores and grains, started plunging from a november high of 11,039 down to a low of 5,615 -- a 49% drop -- on 1/29/08.

the fall erroneously led some (including me - i sold osg too quickly) to see an economic abyss ahead for the global economy, the theory being that shipping reflects overall economic activity.

in reality, what happened this time had more to do with negotiations between iron ore miners in brazil and the consumers of it in china. the stalled price talks meant the ores weren't being hauled across the ocean, and many large ocean cruisers were available to be rented for substantially lower day rates.

when the negotiations settled, things picked up. and since the low in late january, the bdi has soared to an all-time high of around 11,800.

here are 3 things to watch/consider moving forward:

coal inventories in china are dwindling fast. accounts vary, with one press report saying 32 power plants have had to shut down due to insufficient fuel. others say overall inventories are down to less than eight days' worth of consumption.

either way, it's low.

compare that to current inventory levels in the us, which now stand at around 55 days and typically average 50 days, according to Paul Forward, a dc-based coal stock analyst at stifel nicolaus, in a recent research report.

one way or another, china will need to replenish those inventories to more sustainable levels (albeit likely lower than ours), or risk continued power-supply issues into the olympics this summer. to a lesser degree, at least in terms of the volume of coal needed, it also needs the coal for producing steel, a vital component for the construction of new buildings and machinery. the metal is made from coked coal, limestone and iron ore.

but the problem for china is that it won't be able to meet that need solely by using domestic sources. instead it will have to turn to the global market and ship it in from overseas.

china will flip from net exporter of thermal coal in 2007 to a net importer this year, according to recent Australian Bureau of Agricultural and Resource Economics projections. that's partially as a consequence of increases in electrical generating capacity, but also as a result of the shuttering of some less-efficient domestic coal mines, analysts say.

thermal coal is used in power plants, whereas metallic coal, of which china is already a net importer, is used to create steel.

the terrible earthquake earlier this month, which has so far left more than 50,000 dead and many more homeless in china, has disrupted the economy in ways that will benefit the bulk freight carriers.

the internal infrastructure is so broken that trains can't be used to haul freight around the country, explains Natasha Boyden, managing director of shipping research at Cantor Fitzgerald. instead, coastal ships are being used to move materials around.

one way or another, that puts upward pressure on the cost of renting all dry-cargo ships, including the very large ocean-going ones.

second, it's been clear that much of the building work previously carried out in the quake zone was shoddy. china will now need to rebuild. to do that, massive quantities of cement and steel will be needed to make reinforced concrete for quake-proof buildings.

and all that material will need to be hauled across the ocean in dry-bulk carriers.

as if all that weren't enough, there is also the credit difficulities worldwide. some us government officials might be saying that the worst of it is behind us, but try telling that to anyone wanting to purchase a dry bulk ship.

not only is it hard for the buyers to find financing, but the shipyards themselves are finding it hard to stay afloat. in some cases, the yards that have taken orders have either yet to be built themselves or have failed to produce any ships.

in addition, there is the rising cost of steel, which has added cost pressures to the financing problem.

the result has been skyrocketing freight rates as demand has outstripped shipping capacity.

the cost of renting a cape-class cruiser, the largest of all the dry-bulk ship categories, was recently around $200,000 -- up from $90,000 in the first quarter, and a deal was inked on friday for $300,000 -- and way above a more "normal" $8,000 back in 2004.

the financing problem also means that it's unlikely any new capacity will come on line soon, helping to keep a floor under freight rates at the very least, or more likely sending them even higher.

the $300,000 deal is really astounding, if one thinks about it. it only adds further evidence to the good news ahead for the shippers.