Recently, the top three iron ore producers Vale , Rio Tinto and BHP Billiton , agreed to price iron ore quarterly, signaling the end of annual fixed-price deals.
Together, the big three control around two-thirds of the $88 billion global seaborne iron ore trade.
Iron ore, which constitutes more than 30 percent of total dry bulk shipments, is considered the primary driver of demand for dry bulk shippers including Eagle Bulk Shipping , DryShips , Diana Shipping , Oceanfreight , Star Bulk Carriers and Safe Bulkers.
China, the world's largest buyer of imported iron ore from Brazil and Australia, protested against the new quarterly system, which could see the country pay a lot more for its iron ore.
The new pricing regime started on April 1, with reports that BHP was already getting more than $130 a ton for its ore under April-June contracts based on the January-March average spot price more than twice last year's fixed price.
Vale's hike, meanwhile, puts the price of ore at around $105 per ton for Japan's Nippon Steel and South Korea's Posco .
"If the quoted Vale price is accurate, the dry bulk market could see significant upside in the coming weeks, as $100 would represent a significant discount to current spot prices," Dahlman Rose analyst Omar Nokta said in a note to clients.
"With more stability and increased visibility into iron ore pricing, the dry bulk market can begin to better reflect the stronger environment across the global industrial complex."
Nokta currently expects rates for capesize vessels, the largest class of vessels that ferry iron ore, coal and grains, to rise 18 percent to $45,000 a day through 2010.
In recent months, the capesize market significantly underperformed other segments of dry bulk as rising spot iron ore prices compressed steel production margins, and squeezed capesize dayrates.
Freight rates for capesize vessels, on the key route between Brazil and China <.BATB> have fallen 40 percent since December, while spot iron ore prices have risen about 70 percent.
Oppenheimer analyst Scott Burk said China's insistence on an annual agreement could draw discussions out longer.
"This could continue to be a near-term drag on dry bulk day rates, but we would expect a significant rebound in rates on inventory restocking as the negotiations come to a close in the coming months," Burk said in a note to clients.
Burk expects Genco Shipping & Trading Ltd and Excel Maritime Carriers Ltd to benefit most, given their leverage to the spot market.
China Demand to stay Strong
China had chafed at the move to shorter-term pricing, and earlier this month the China Iron and Steel Association said it was drawing up measures to reduce the number of traders allowed to import iron ore.
"It seems China is going to boycott the Australian and Brazilian mines, and start buying from India," BB&T Capital Markets analyst Kevin Sterling said.
"They've also been stockpiling iron ore. That is a negative."
According to Commodore Research, Chinese iron ore imports have risen steadily since January, increasing to about 52.2 million tons in March. This is up from an average of about 37 million tons a month in 2008.
Rio Tinto recently forecast China's iron ore demand to double to 900 million tons per year by 2020.
FBR Capital Markets analyst Christian Wetherbee also said China would continue to drive commodity demand.
"We expect China to remain a growing importer of iron ore, with a target for a 7 percent increase in imports in 2010 to about 670 million tons, as imports will continue to represent a significant source of iron ore tonnage, relative to domestic production," he said in a research note.
BB&T's Sterling agreed.
"China's stockpile will hold them out for a decent amount of time, but they will have to come back in a c
