Global manufacturing activity is a leading indicator for world trade volume. When manufacturing activity expands, shipments of raw materials such as iron ore, coal and oil rise, which benefits dry bulk shipping and tanker companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Ship Finance International Ltd (SFL) and Knightsbridge Tankers Ltd. (VLCCF).
Last month, JP Morgan’s global manufacturing purchasing managers’ index (PMI) jumped to 51.4 from 50.1 in December (see “JP Morgan’s global manufacturing activity index jumps“). The latest data, updated on February 28th, showed that the index fell to 50.8. Figures above 50 marks expansion and below 50 indicates contraction. Data points that are further away from 50 signify the degree of expansion or contraction.
China’s New Years and weak European market likely affected data
Although the decrease in the index points to short term weakness in the manufacturing sector, two factors can explain the decline. First, China’s New Years occurred in February this year, instead of January (like last year). Manufacturing firms have shifted their schedule so that most orders and production were processed in January. The difference in the New Year celebration most likely contributed to a jump in the January data as well. Second, Eurozone’s flash (preliminary) manufacturing PMI data, released by Markit Group Ltd., pointed to a steeper contraction in the region suggesting an ongoing weak recovery for the region.
Weaker recovery than 2009
Given the favorable monetary policy and low inflation environment, investors should continue to see expansion in the global manufacturing sector. Historically, only PMI levels above ~52.5 have coincided to strong global economic growth. Until the PMI begins to move higher, it is unlikely for manufacturing related industries to report strong growth. Thus, investors may see a weaker global recovery compared to 2009′s over the medium to long term this time around.
A weak recovery is nonetheless still positive for shipping companies such as DRYS, DSX, SFL and VLCCF. It should also benefit the Guggenheim Shipping ETF (SEA), which invests in high dividend paying companies with strong balance sheets. The ETF’s current dividend yield was 3.08%, as of March 1st of 2013.