China’s manufacturing activity is a key driver of demand for the dry bulk shipping industry, which ships industrial raw materials, such as iron ore, thermal coal and coking coal, across the ocean. One metric that investors often use to gauge demand is the amount of loans that banks issue to businesses and individuals for projects, property purchases and investments.
New loans continue to outpace previous years
The latest data available from the People’s Bank of China shows an increase of 793 billion RMB in loans for the month of April 2013. Although lower than March 2012’s figure of near one trillion RMB, April’s figure was slightly higher than those during the same months in 2011 and 2012.
On a year to month basis, the number of new loans issued rose to a record 3.5 trillion RMB in April 2013, widening its gap from those in 2011 and 2012. New loans have increased as the government loosened monetary policy in mid-2012 by cutting banks’ reserve ratios and interest rates as inflation fell and the economy slowed. Policymakers will unlikely tighten lending as inflation remains low (see China inflation falls, shipping and broad market climb). As new loans are a leading indicator of investment or spending projections over the following months, dry bulk shipping demand should be positively supported in 2013.
Fiscal stimulus unlikely as government emphasizes reform
Additional fiscal stimulus is unlikely, given that the government recently expressed determination to establish reforms that will let the private sector take a larger role in the allocation of resources, foster urbanization and promote consumption over the next decade, while guarding the country from financial risks. Although seemingly bad loans are likely to be questioned, ongoing reform should lessen its significance over time as the private sector is generally more concerned with profit motives.
It is also important to note that China is still heavily driven by infrastructure led investments and the government is cautious not to let the industrial sector slip too much as it would cause a negative spillover effect on the entire economy. In the long run, urbanization should continue to support demand for raw materials, such as iron ore and coking coal, that are used to make steel for buildings, even though the golden period of growth has likely ended (see Dry bulk shipping demand growth will unlikely hit pre-2008 levels for more info).
The current level of loan issuance shows dry bulk shipping firms, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Navios Maritime Partners LP (NMM), should see higher demand in 2013. But risks remain in the short-term due to industry oversupply (see Capacity growth portrays short-term negative but long-term positive for shipping) and the government’s focus on crafting its reform to support sustainable long-term growth. This is also applicable to the Guggenheim Shipping ETF (SEA), which invests in large shipping companies worldwide and performs similar to the Dow Jones Global Shipping Index.
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