Rebounding iron and steel price suggests a bottom
Nearly a third of the dry bulk shipping industry’s trade involves iron ore, a key material for the steel industry, with China being the largest importer. As prices for iron and steel often reflect demand, iron and steel prices in China often illustrate import demand. When the prices for iron and steel price rise, shipping companies tend to benefit.
According to the National Bureau of Statistics of China, input prices for iron and steel producers fell -7.8% year-over-year in November 2012. Although negative, this is better than the decrease that occurred in October, -8.9%, and September, -9.2%, of 2012. As the chart above shows, prices for raw materials used in iron and steel production continued falling at a steeper rate since mid 2011 as an overheating economy prompted the government to tighten money supply in the market and Europe’s sovereign debt crisis reduced global production.
However, when there is a crisis, the government will eventually do something to bandaid it. In September 2012, the Chinese government announced a $160 billion stimulus for the economy through infrastructure investments. This includes houses, railways, ports and roads that are major end users of steel. That has led to a rebound in steel price, which will increase revenue and profits for steel manufacturers benefiting the Market Vector Steel ETF (SLX).
To accommodate the higher steel demand, China will import more iron ore and coking coal1. This would benefit dry bulk shipping companies such as DryShips, Inc. (DRYS) and Diana Shipping, Inc. (DSX) that specifically haul iron ore and coking coal across sea. Investors looking to diversify into major shipping companies can use the Guggenheim Shipping ETF (SEA). Australia and Brazil, being the major exporters of the material to China, will also benefit. For investors looking to invest in the two countries, they can do so through iShares MSCI Australia Index Fund (EWA) and iShares MSCI Brazil Capped Index Fund (EWZ).
- To see how the steel industry moves with the shipping industry, see “When steel rises, shipping rises”. ↩
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