SOURCE: Rothman Research

Rothman Research

April 12, 2010 08:59 ET

Iceberg Straight Ahead for Iron-Ore Sea Carriers

JOHANNESBURG, SOUTH AFRICA--(Marketwire - April 12, 2010) -  www.rothmanresearch.com - It's a tough call to stand bewildered in the middle of a tug-of-war between two opposing camps, knowing that the outcome of the battle would have a huge impact on one's future. The recent shift from a 40-year annual benchmark pricing system to the new quarterly system favoring spot market principles, has lead to a deadlock between China, the new uncontested steel consumer globally whose steel industry has grown into the largest in the world, and its iron-ore suppliers which happen to be the three biggest iron ore miners in the whole-wide-world. Caught in between are the dry-bulk carriers companies like DryShips Inc. (NASDAQ: DRYS) and Navios Maritime Holdings Inc. (NYSE: NM) that are unanimous on the fact that the new pricing system would be a heck more volatile on dry-bulk shipping rate, whilst they remain largely in the dark on the real impact this pricing change will have on their overall stake in the iron-ore trade.

*Complimentary downloadable research reports on DryShips Inc. and Navios Maritime Holdings Inc. are accessible upon registration at http://www.rothmanresearch.com/article/drys/23413/Apr-12-2010.html  or  http://www.rothmanresearch.com/article/nm/23414/Apr-12-2010.html

"To understand the impact of this quasi revolution in pricing system, we need to understand how it worked for the past 40 years and how it is going to work today. The annual pricing system, or so-called benchmark system, was a one price system between miners and steel makers which was agreed for a whole year and for the entire industry to follow. However, some iron-ore trade still existed on the spot market at a very small scale. Traditionally, the benchmark system was more advantageous to the steel makers than the miners, and the existence of a small spot market complicated things for the miners as the spot market was more inclined to the tune of the market that is the basic laws of demand and supply. Hence, when spot market prices were higher than the benchmark price, miners were not able to cash in on the extra revenue. However, when spot prices were lower than the benchmark, some steel makers were scrupulously taking advantage of this and buying their iron ore from the spot market. The disparity of using the benchmark system was very much in favor of the steel makers," commented Jack Benassi, senior analyst at www.rothmanresearch.com.

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Jack continued by stating: "With the quarterly contracts which is going to be more patchy and closer to the spot market principles, miners believe they would have a better chance of balancing their revenue and cashing in on the higher profit margins when iron-ore prices are higher. But where does all of this affect the bulk-shippers, you might ask? Well, use of the spot-price principles will render shipping rates very unstable. To simplify, higher demand of iron-ore from steel makers have always favored higher shipping rates. Use of a spot market variable as pricing system, will give miners the ability to increase their raw materials prices at any time, adjusting for steel makers demand for iron-ore and thus undermining the profit bulk-carriers would have otherwise made."

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