Europe is China’s largest trading partner according to the European Commission. Since most of the two-way trade between China and Europe is focused on industrial goods such as machinery and transport equipment and manufactured goods, China’s industrial activity is highly correlated to both European net exports and industrial production. When Europe’s manufacturing activity improves, it is often a positive indicator for China’s export and manufacturing activity. This is relevant to the shipping industry as well, because China is a major importer of raw materials such as iron ore, coal, and oil, which are necessary for industrial production.
On January 2013, Eurozone’s purchasing managers’ index (PMI) rose to 48.6. The data was reported by Markit Economics, which is an independent global provider of influential business and economic surveys. To put simply, the purchasing mangers’ index is an indicator for manufacturing activity within a given region, in which levels above 50 suggest expansion and those below 50 suggest contraction. The further the absolute value of the survey result is away from 50, the stronger the expansion or contraction will be.
While still in contraction, January’s 48.6 figure is higher than the previous 47.2. Often times, the market rises not only based on whether an economy’s production exceeds the previous year’s or is expansionary, but if the outlook is becoming better or less contractionary, as we have seen in the U.S. market over the past four years. Rising Eurozone PMI since mid-2012 was probably helped by the lower Euro, stabilization in Europe’s sovereign-debt crisis, and several stimulus announcements from countries like China, Japan and Korea.
From a demand perspective, Eurozone’s rising PMI is a data point that is positive for shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX), and Teekay Corp. (TK). It should also provide support for the Guggenheim Shipping ETF (SEA), which generally tracks the Dow Jones Global Shipping Index. Although this is a positive development for the medium term, shipping margins and day rates (prices) are still below break even levels necessary for profitability in the immediate term.