Key crude tanker stocks updates, September 20–27

Part 5
Key crude tanker stocks updates, September 20–27 (Part 5 of 10)

Why China’s stabilizing manufacturing activity encourages tankers

The significance of China’s PMI and tanker demand

China, along with the United States, is another country that tanker companies are keeping their eyes on. As one of the fastest-growing countries in the world, with a population four times that of the United States, China’s oil imports have been growing at low double digits over the past four years. One indicator that’s often reliable is the country’s manufacturing PMI (purchasing managers index). When the PMI rises, it often suggests higher economic growth, which drives oil demand and imports. Conversely, when the PMI falls, investors often see it as a negative.

China Manufacturing State PMI & Oil  Consumption 2013-10-01Enlarge Graph

China’s manufacturing PMI rises to 16-month high

China’s manufacturing PMI rose slightly from 51.0 in August to 51.1 in September 2013. According to the latest data from the DOE (Department of Energy), China’s liquid fuel consumption grew by just 2.04% in August, down from 2.63% in July. Analysts often perceive PMI figures above 50 as expansion, while levels below 50 often suggest contraction. The farther the numbers are from 50, the stronger the strength of expansion or contraction.

It’s important to know that the index is a semi-sentiment index, in which the Federation of Logistic and Purchasing sends out surveys asking companies whether activity is improving, unchanged, or deteriorating, rather than actual data, based on factors such as new orders, production levels, supplier delivery time, raw material inventory, and employment. As the PMI has historically led year-over-year oil consumption, we would likely see higher oil use later this year.

China Manufacturing PMI Breakdown 2013-10-01Enlarge Graph

More manufacturing and order activity but less hiring and quicker delivery time

The overall PMI was driven higher by expanding activity in new orders, output, and inventory.

  • New orders, which makes up 30% of the headline index, rose from 50.2 to 50.7.
  • Output, which makes up 20% of the headline index, rose from 52.6 to 52.9.
  • Input inventory, which makes up 10% of the headline index, rose from 48.0 to 48.5.

Offsetting these increases were supplier delivery and employment.

  • Supplier delivery time, which makes up 15% of the headline index, rose (quickened) from 50.4 to 50.8, which is often seen as a negative because it means there’s less congestion and trade is weak.
  • Employment PMI, which makes up 20% of the headline index, and is often a sign that there’s more work to do, fell from 49.3 to 49.1.

Business sentiment, a sub-index that’s not part of the main index but also worth noting, fell from 59.40 to 58.40. This is the first decline we’ve seen since June 2013.

Growth stabilizing but higher rate unlikely

Despite the recent improvements in China’s manufacturing sentiment, as the government expedited public projects and pushed policy to help small businesses, it’s unlikely that its economy will recapture its high-single-digit or double-digit growth again. But September’s data does show that economic growth appears to be stabilizing and the government will reach its target of 7.5% GDP growth this year.

This bodes positively for tanker demand, as well as shares of tanker stocks like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL), and Teekay Corp. (TK), as well as the Guggenheim Shipping ETF (SEA). But investors shouldn’t expect oil demand to grow more than 7%, like it did pre-2011.

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