One of the best ways to track shipment volume from China is by looking at trade indicators. China’s purchasing managers index (PMI) for new export orders is one such valuable indicator. When the country’s new export order PMI rises, it is often positive for the shipping industry that hauls all sorts of raw materials.
New export order drops from 50.0 to 48.5
For January 2013, China’s Federation of Logistics and Purchasing (CFLP) reported a drop in China’s PMI for new export orders of 48.5 from the previous month of 50. Figures above 50 signal expansion in orders while those below 50 suggest declines. Since PMI data typically is an indicator of economic activity, investors follow changes in this number very closely.
Weak export order points to weak Europe recovery
The indicator is important for the shipping industry because China is the world’s largest exporter. Lower export orders suggest ongoing weakness in Europe’s economy — China’s largest trading partner — as the effects of austerity measures are felt throughout the continent. In the short to medium term, China may have to rely more on domestic orders.
China demand should drive shipping in the short run
On the bright side, last year’s stimulus package and looser monetary policy in China have led to higher economic activity. As they continue to work through the economy, domestic demand should increase further. Additionally, certain indicators point to improvements in Europe’s industrial activity in the coming months.1 This is positive for shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX), Eagle Bulk Shipping, Inc. (EGLE) and Teekay Corp. (TK) in the short to medium term.
However, ongoing excess capacity within the shipping industry will likely limit upside for the short to medium term.2 Upside is likely to be capped for the Guggenheim Shipping ETF (SEA) as well.