Only seven months ago, dry bulk shippers were on top of the world.  The rapid growth in spot prices transformed mundane companies like DryShips (Nasdaq:DRYS) and Excel Maritime (NYSE:EXM) into multi-billion dollar growth stocks, trading millions of shares per day.

Its a different world today for the dry bulk shippers.  Slowing growth in China means less demand for their boats, which transport iron ore, coal and grains.  Combined with the inability of customers to obtain credit and plummeting commodity prices, these factors have caused spot prices to fall off a cliff.

Shares of dry bulk shippers have fared no better.  So with both spot prices and shippers down 93-96%, are we at a good entry point?  Bulls would say so.  They argue that at these prices the shippers will be taken private and old ships retired.  Plus, they say, the revenues of shippers like DRYS and EXM are tied as much to high-priced time charter contracts as they are to volatile spot prices.

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I’m not convinced.  With financing so hard to come by, levaraged buyouts will be difficult.  And those contracts?  Noneconomic contracts have a way of being broken.  Even if the contracts are ironclad, remember that they are only as good as the solvency of the counterparty.  Also, the  shippers and shipping companies each have an interest in renegotiating unfavorable contracts, because neither benefits in the long term by enforcing a contract that impairs the business of the other.

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There is some good news.  First, much of the supply that was to come on board in 2009 and 2010 will be delayed or canceled.  There will be new builds, but nowhere near as much as was feared only a year ago.  Second, if you believe the rumors, China is mulling an increase in base metal purchases.  Imported metals and ores will need to be transported.  Third, fuel and labor costs are decreasing.

Bottom line: If we get a broad market rally, the dry bulk shippers like DRYS and EXM will squeeze the shorts.  However, that won’t change the headwinds that impact their business.  Unless the BDI recovers to a point where the spot prices are profitable, the future of dry bulk shippers is grim.  I’m not sure where this inflection point lies, but for most dry bulk shippers it is probably above 2000, or more than 3 times current spot prices.  There will likely be a number of bankruptcies in the industry.  Before you bet on a buyout or a the continuation of a large dividend, consider first whether the company will even be able to weather another bad year.

DISCLOSURE: No positions.