Ever since the iron ore miners forced customers to accept quarterly price changes, the price for seaborne iron ore has more than doubled. China, the largest consumer of iron ore, resisted for a while but eventually gave in. Now, as China tries to rein in inflation by tightening its monetary policy, iron ore prices are still high and China’s steel mills aren’t buying as much.

But higher prices are expected to dull the pain. Miners Vale SA (NYSE: VALE), Rio Tinto Ltd. (NYSE: RIO), and BHP Billiton plc (NYSE: BHP) may face a few production bumps this year, but the overall higher contract prices for iron ore are expected to make up for lower volumes.

Australia has lowered its iron ore export forecast by 0.6%, but still expects total production to exceed the 441 million metric tons the country produced in 2010. Of that amount, 437 million metric tons are exported, and much of it goes to China. Had the country not suffered from torrential rains and flooding earlier this year, Australia’s production could have reached as much 470 million metric tons. The country is the world’s largest exporter of iron ore.

Australia’s coal production and exports were much harder hit, and are expected to lose about 4.4% of the country’s metallurgical coal output and 5.6% of its met coal exports in the year ending in June 2012. As with iron ore, Australia exports more met coal than any other country in the world, about 60% of the world’s total.

Chinese demand for iron ore is a bit harder to pin down. Steel prices have fallen as a result of government’s tightening of lending policies. Domestic demand for steel has fallen for the same reason. If builders can’t get loans for new construction, then less steel is needed.

The irony is that China produced more steel in May, over 60 million metric tons, than in any other single month ever. That doesn’t sound much like a tight market. And the Chinese are thought to have been working through inventories, meaning that if the country’s mills want to make more steel they’ll have to buy more iron ore and met coal.

Not only that, but they’ll have to ship it to China. And that’s very cheap now, much to the dismay of shippers like Diana Shipping Inc. (NYSE: DSX), Genco Shipping & Trading Ltd. (NYSE: GNK), Excel Maritime Carriers, Ltd. (NYSE: EXM), and Eagle Bulk Shipping Inc. (NASDAQ: EGLE).

Shippers are struggling. Many ordered new ships at the top of the market in early 2008, and now there are too many to fill with cargoes. The Baltic Dry Index, which tracks rates for dry bulk shippers, has rissen from its recent bottom of around 1,050 to around 1,420, still almost 90% down from more than 11,000 in June of 2008.

Some, like Diana, had already negotiated rates so haven’t suffered quite as much, but Genco, Eagle, and Excel have been hit worse. Shippers are reducing sailing speeds by nearly a third, which means more days on the water and less fuel used. But that’s not a long-term solution to their problems.

While there really are no winners here, there may be some real values. Diana is trading at $11.00 today, just above the low of its 52-week range of $10.46-$14.23. The company’s trailing P/E is 6.71 and its forward P/e is 11.47. The price/book ratio is 0.78.

Genco, trading at $7.64 today, is also close to the bottom of its 52-week range of $6.28-$18.08. Genco’s trailing P/E is 2.23 and its price/book ratio is 0.23.

Excel posted a new 52-week low today to set its new range at $2.96-$6.63. The stock’s trailing P/E is 1.31 and its price/book ratio is 0.15.

Eagle is trading at $2.35 today, with pennies of the low in its 52-week range of $2.25-$5.75. The trailing P/E is 8.74 and the forward P/E is 26.22. The stock’s price/book ratio is 0.22.

The very low price/book ratios indicate either that the company is a terrific bargain, or that it’s dead on its feet.

Paul Ausick

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