Continued from Part 4
The significance of China’s industrial output
China’s industrial output—crude steel and electricity outputs, to be specific—are bellwethers of demand for raw material shipments. When industrial production rises quickly, so does demand for raw materials like iron ore and coal, which often accompanies higher domestic production and imports. Since dry bulk ships take one to two years to construct, supply is quite inelastic. So changes in imports have large impacts on shipping rates, and vice versa.
Industrial output rises high
The year-over-year change in China’s industrial output rose to 9.4% in July from 8.9% in June. Industrial output has fallen from last year’s December high of above 10% growth, when the government clamped down on soaring housing prices and shifted its stance towards lower economic growth in return for a more sustainable growth rate. But since second quarter GDP growth came in at exactly 7.5, the target the government set for the year, there’s an incentive for the government to increase public stimulus. This is likely what drove industrial output higher.
Electricity output rises to a high
For the same month, electricity output rose to a high of 10.2% year-over-year growth—higher than June’s 8.1%% and a record since September 2011. Although electricity output doesn’t directly reflect crude steel production, it still depends on industrial activity that uses a lot of crude steel in constructing buildings and manufacturing cars. While the July update for crude output isn’t available, in China, most steel manufacturers are affiliated with the government. This means they have a responsibility to keep workers employed, or social unrest due to unemployment can create trouble. Plus, unless they’re losing significant money, companies have noted it’s often better to keep output constant rather than shut furnaces down only to restart them later. So it would be surprising if crude steel output falls substantially when we update it.
Bulls and bears
Investors have worried since a few months ago about whether the government’s move to cool the property market down would hurt industrial output. While the bulls will say industrial output continues to grow positively and hasn’t fallen off a cliff, the bears will point out that output growth isn’t as high as it was before. They’re both right. Compared to before the financial crisis, in 2010 and 2011, industrial output consistently stayed above 10% for steel and electricity output. This time around, though, growth reports have been lower, as the government’s not so eager to energize the economy by pumping more stimulus into it like it did before. This is because China’s transitioning to a consumption- and private enterprise–led economy. Just like how a job switch can be time-consuming and take some ramp-up time, the switch will take a while.
Implication for shipping
Because share prices reflect the future outlook of a company’s earnings potential, lower output growth has negatively impacted share prices of shipping companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Eagle Bulk Shipping Inc. (EGLE), Safe Bulkers Inc. (SB), and Navios Maritime Partners LP (NMM) in the short term. While China’s economic growth is unlikely to expand as fast as it once did, the market is starting to realize this, knowing that the world isn’t going to collapse. This will be positive for long-term share price movements driven more by long-term fundamentals.
Learn more about indicators that drive the dry bulk industry
© 2013 Market Realist, Inc.
But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.