ANALYSIS-Will falling iron ore prices propel drybulk shippers?

* Iron prices set to fall 30 pct this yr

* Iron ore makes up for over 25 pct of drybulk shipments

* Analysts divided on impact of iron ore price decline

By Hezron Selvi

BANGALORE, March 6 (Reuters) - Drybulk shipping companies get a large chunk of their revenue by carrying iron ore across the oceans, and with prices of the raw material set to see a steep fall this year, industry observers are divided if it would provide succor to a recession-battered drybulk sector.

A drop in the contracted price for iron ore will help drybulk shippers in two ways, said analyst Scott Burk of Oppenheimer & Co.

"First of all, lower prices could potentially lead to higher demand for iron ore imports from China from longer sources as opposed to India," he said.

Secondly, a bigger spread between higher spot iron ore prices in India and China and lower contract prices in Brazil gives the steel mills in China more potential margin to ship the cargo across the ocean, he added.

Freight rates for dry bulk ships have plummeted 90 percent from the highs hit during the commodities bull run last year.

Freight rates for capesize vesels -- the largest class of vessel that ferry iron ore, coal, and grains -- on the key route between Brazil and China have fallen to $21 a tonne, according to Reuters data, down from above $100 a tonne in June last year.

Analyst Omar Nokta of Dahlman Rose, who believes a fall in iron ore prices will be beneficial for the drybulk industry, said, "What's happened over the last six months is that the steel mills have been operating just above or just at cost."

"So there's really not much that they can do. They are out there paying as little as possible for freight. Once margins expand they should be able to buy more and pay a higher (freight) rate.

BUT WILL THEY PAY?

"Why would they want to pay the shippers more," Natasha Boyden, Managing Director - Equity Research, of Cantor Fitzgerald said.

"The steel production in China is down. Although we have the Chinese stimulus plan, clearly all sorts of demand for construction are also down," she added.

Boyden said the potential decline in iron ore pricing could be a fallout of the dramatic fall in steel production year-over-year.

The fall in demand for the commodity is going to clearly have an impact on the demand for ships, she added.

Steel prices in China dropped sharply in the second half of last year, as demand from the world's largest metal consumer and its trade partners, including South Korea, Europe and the Middle East, slumped as the global financial crisis hurt the real economy. They briefly rebounded in January, but have since fallen again.

Baosteel Group, China's flagship steelmaker, expects domestic steel prices to remain weak in 2009, since demand in the world's top steelmaking country has not yet recovered, an executive said on Wednesday.

"If we think that demand (for iron ore) is being hindered by high prices then lower iron ore prices will be considered a good thing for the drybulk shippers," analyst Gregory Lewis of Credit Suisse said.

"If, however, the decline in iron ore prices is a result of simply the fact that there is lower demand then that's a negative for shippers," he added.

However, everyone agrees that an early resolution to price negotiations between iron ore miners and steel companies will be a positive to the drybulk shippers as it will lead to increased shipments.

Australian iron ore miners BHP Billiton and Rio Tinto are most likely to be the price setters this season, which begins in April.

"What's going to help the dry bulk industry the most will be an increase in volumes," Lewis said. (Editing by Jarshad Kakkrakandy)