China’s October activity may point to shipping upside
China’s Purchasing Managers’ Index (PMI) is an important outlook indicator for dry bulk shipping companies. The index has been closely followed by investors lately in order to assess China’s ability to sustain growth as the country prepares for a once in a decade leadership change. Since China is the major importer of iron ore, coal and grain, when the country’s PMI rises, dry bulk shipping companies will generally follow with an appreciation in share price.
On October 31, 2012, China’s National Bureau of Statistics released the official number for October’s PMI: 50.2, which is higher than the 49.8 reported for September. Numbers above 50 indicate expansion, and figures below 50 suggest contraction. Breaking the PMI down, all but backlogs of orders increased in October. Although import is still contracting with a figure of 48.4, it is still higher than last month’s 47.7. According to a report compiled by Li & Fund Research Center, 8 of the 21 industries surveyed reported expansion.
The recent increase in PMI can be attributed to China’s September 7th announcement of the $158 billion stimulus in infrastructure — in particular, subways, light / urban railways, water ports, highways and waste treatment projects. These projects are all steel and energy intensive projects, which would be beneficial for iron ore transporters. Since the announcement, 62% grade iron ore import price has risen by about 37.70%.
For the month of September, however, China’s iron ore import volume has not climbed much. This may be because import depends on orders placed by companies that are receiving the subsidies. As such, import volume can lag. When iron ore import volume rises, dry bulk shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX), Eagle Bulk Shipping (EGLE), and Euroseas, Ltd. (ESEA) will benefit. For investors who are interested in diversifying investments in multiple dry bulk shipping firms as well as other shipping companies, The Guggenheim Shipping ETF (SEA) is an option.
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