Being the largest importer of raw material in the world, manufacturing activity in China is one of the most significant key drivers of shipping companies’ performance. When manufacturing activity picks up, China will import more dry bulk raw materials, such as iron ore, coal, and grain, to meet demand. This will raise shipping rates or increase the amount of business for dry bulk shipping firms, which will lead to higher free cash flows and share prices.
Manufacturing activity rose, but missed estimates
For the month of March, China’s official manufacturing PMI rose to 50.9, its highest level in 11 months.1 While it was an increase from February’s 50.1, the figure was well below analysts’ average estimate of 52, polled by Reuters. Several dry bulk shipping firms pulled backed on the disappointing news on April 1st. However, pull backs due to missed estimates tend to be short term drivers rather than long term ones, unless it is an indication long term fundamentals have changed (or is changing).
What to take away from the result and effect on the market
Manufacturing activity in China continued to accelerate at a faster pace in March, driven largely by an increase in domestic demand. This supports the view that the country has been able to shield itself from weaknesses in Europe, its largest trading partner. Over the long term, manufacturing should continue to grow. In the short term, however, higher manufacturing growth may be limited as the government began outlining plans to curb more rising property prices in March, which reduces demand for construction materials. Several banks have reported reduction in lending for property developers.
Short term risk for shipping firms but positive long term outlook holds
Lower demand for construction materials will be a risk for shipping companies that haul iron ores and coals across water for the short term. These iron ores and coals are used to manufacture steel, the main building material used in construction. Some examples of companies that will be affected are DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE) and Safe Bulkers Inc. (SB). Although the Guggenheim Shipping ETF (SEA), which invests in large shipping worldwide, will also be affected, larger companies tend to weather these risks better as their shipping contracts tend to be longer.
- The PMI is a measure of economic activity often followed by analysts and traders. Figures above 50 indicate solid expansion while those between 42 and 50 show possible growth; levels under 42 signal a potential recession. ↩
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