China is the world’s largest producer of steel. It is also the largest importer of iron ore and second in coking coal, both which are needed to make steel. As most people have read about in the media, China’s economic activity has historically been driven primarily through investments instead of consumption. That means industrial related companies make up a large portion of China’s stock market. Thus, when the Chinese stock market rises, shipping companies often follow.
On February 15th of 2013, a popular Chinese ETF called iShares FTSE/Xinhua China 25 Index (FXI) rose to $40.32. The Guggenheim Shipping ETF (SEA), an ETF that invests in several large shipping companies globally, fell to $17.21. From November of 2012, both indexes have been climbing along with other markets as stimulus packages were rolled out and global economic data supported a recovery trend.
In a separate article, we have talked about how the steel industry has a strong positive relationship with shipping1. However, it is also good to know that most of the world’s steel production happens in China, occupying 45.1% of world’s total output in 2011 according to the World Steel Organization. While how significant is the steel industry to China’s total economic activity value (GDP) is difficult to obtain, the industrial sector makes up about 46.8% according to the CIA World Factbook; steel itself is used in cars, infrastructures and many other types of construction. That basically covers almost everything in the industrial sector.
Investors who are already in the shipping industry or who are looking to invest in it may benefit from following key drivers that may be moving the Chinese market. Alternatively, they can also invest in FXI2. Although there is an emerging trend that China is shifting its economy towards more domestic consumption, it will be gradual. In the mean time, higher prices for FXI should be positive for SEA. Some examples of smaller companies that will also benefit are Safe Bulkers, Inc. (SB), Diana Shipping, Inc. (DSX) and DryShips, Inc. (DRYS).