I've sailed through my share of squalls, but I've never seen conditions as perilous as they are right now for the dry bulk shipping industry.

Pelted by frozen credit and eroding demand, the world's seaborne carriers of dry bulk commodities are getting tossed around like rubber duckies in a bathtub. This storm is likely to claim its fair share of victims by the time the seas mellow, but a fresh analysis may reveal the shippers most likely to remain afloat.

Storm warning: Category 6
Within a matter of months, the benchmark Baltic Dry Index -- which tracks worldwide shipping rates for goods like iron ore, grain, and coal -- has sunk an incredible 93% from an all-time high in May to a nine-year low. With banks refusing to issue the essential letters of credit that facilitate shipping transactions, physical stoppages have been reported, where fully loaded ships are unable to begin their journeys.

Meanwhile, plummeting commodity prices have doused the flames of industrial production in the near term. Bellwether industrial names like ArcelorMittal (NYSE:MT) and Aluminum Corporation of China (NYSE:ACH) have cut production, reducing shipments of the raw materials they require.

Coal shipper Industrial Carriers fell prey to the reduced charter rates and filed for bankruptcy last month. Zodiac Maritime Agencies, another privately held shipper, may pull as many as 20 Capesize vessels out of operation until pricing improves. This extremely challenging environment has some analysts expecting a slew of bankruptcies within the next couple of years.

Storm surge batters shipbuilders
By virtue of the time required for construction, the global supply of bulk carriers is characteristically inelastic. Until recently, therefore, shipbuilding activity had been proceeding at a frenzied pace, to address the global boom in commodity demand. Inelastic supply sets the stage for violent reactions when cycles reverse, and the credit crunch reversed this build-out cycle in a heartbeat.

Banks have abruptly withdrawn financing for some new constructions, and have reduced the portion of shipbuilding costs they are willing to finance. Some smaller Asian shipbuilders could face bankruptcy. During the first half of 2008, at least 21 vessel order cancellations were recorded just among Chinese shipyards.

In this Fool's view, the breakneck speed with which this perfect storm has battered shipbuilding activity places the eventual recovery of the sector somewhat closer at hand -- especially in light of China's announced stimulus plan to invest hundreds of billions in infrastructure, which will boost Chinese commodity demand. Moreover, if the severity of the present storm does claim additional victims, then those left standing may enjoy a more favorable competitive landscape. Which shippers are best-positioned to survive this perfect storm?

Salvaging in the aftermath
We're looking for companies with the least possible exposure to spot-market pricing for vessel leases. Those shippers with substantial portions of their fleets engaged in contracts that will be over in 2009 find themselves at a disadvantage. Large debt loads and an overly aggressive pipeline of pending vessel constructions must also be considered danger signals.

On the strength of long-term charter contracts, earnings reports from many shippers have yet to reflect the dire reality of the prevailing spot prices hovering near break-even levels. Shippers like Eagle Bulk Shipping (NASDAQ:EGLE) and DryShips (NASDAQ:DRYS) have delivered solid third-quarter earnings, and I anticipate similar strength from Diana Shipping (NYSE:DSX) when the company reports Wednesday.

Unlike fellow Fool contributor Toby Shute, I have some concerns about DryShips. While I applaud the excellent prices locked in for long-term contracts for much of the fleet, the risks of a debt load greater than five times the company's market capitalization, combined with remaining spot market exposure, are too hot for this Fool to handle. Excel Maritime Carriers (NYSE:EXM) is in a similar boat, with $1.3 billion in long-term debt and 30% of its fleet exposed to the spot market.

Whereas Eagle Bulk Shipping's aggressive growth agenda -- with 34 vessels on order -- looked like a Foolish opportunity in August, before the Wall Street Panic of 2008, under this new paradigm these commitments represent substantial risk.

Both Diana Shipping and Navios Maritime Holdings (NYSE:NM) enjoy more conservative balance sheets with lower debt burdens. While I've previously favored Diana, the number of lease contracts for the mid-size Panamax vessels due to expire during 2009 is unfortunate. On the other hand, Diana's larger Capesize vessels are chartered through at least 2011, and the company is building only two new vessels. Navios, meanwhile, enjoys a fleetwide average charter duration of 4.7 years, and it has already penned contracts for six of the 10 Capesize vessels presently on order. These two shippers are my Foolish picks to survive the sector's perfect storm.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.