The significance of real estate for dry bulk shippers
China’s real estate sector is a key driver of demand for dry bulk ships. Buildings are a major source of demand for steel, which affects shipments of iron ore and coking coal. So several dry bulk shippers mention “urbanization” in their presentation as a key driver of business growth. This means high real estate activity is often positive for dry bulk shipping demand, and vice versa.
Real estate growth cools because of February data
For July, sales of buildings in China grew at a year-over-year rate of 16.20%, compared to 14.47% in July and 17.87% in June. Using the last six points (usually six months) of data, annual growth remains at a solid fall from 40.98% in July to 30.79%. We can attribute the decline to the removal of February 2013’s data point, which grew at 77.35%. Sales in China can be volatile from month to month, so we smoothed the data to show the bigger picture. The year-over-year growth also takes into account seasonality, and analysts often look at this rate because the market tends to move when the outlook gets better or worse, rather than when it’s good or bad.
The importance of building sales
Historically, building sales growth has often mirrored economic growth in China and elsewhere in the world. This is because houses are the biggest purchases most individuals can make. Plus, central banks will often reduce interest rates in times of recession or economic slowdown, which is an incentive for people to purchase houses at the time. Better economic outlook and employment outlook are also some of the factors that drive people to purchase houses and for businesses to open new stores.
Price growth is falling
The year-over-year change in building prices (measured in price per square foot of floor space sold) continued to fall in August, reaching just 7.48% using the last six data points. This is a significant improvement from the high of 11.96% we saw in March, as the government tried to cool the property market down to prevent a bubble through restriction of credit to individual buyers and the imposition of a capital gains tax on sellers.
Implication of falling growth
Falling building sales could be a short-term negative, especially if the market was expecting buoyant growth, which could affect demand for dry bulk shipments and share prices of companies such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB) unfavorably. If growth slows further, it can have a negative impact on real estate construction activity and shipments of dry bulks.