China and the dry bulk shipping industry PART 3 OF 7
1 reason dry bulk investors need to follow China’s real estate
Why is the real estate climate index important? In 2010, about 32% of China’s steel use went to the property market, according to KPMG. So China’s real estate sector can have a large influence on coal and steel imports. One indicator that reflects this activity is the real estate climate index.
Real estate climate index
In October 2013, China’s real estate climate fell from September’s 97.25 to 96.88. The National Bureau of Statistics developed the index to capture the trends and situation in the property market using eight indicators related to land, capital, and sales. When the real estate climate rises, analysts generally consider it positive for shipping rates, whereas falling figures point to a possible negative. According to the National Bureau of Statistics, figures above 100 show prosperity, whereas figures below 100 mark depression. Moderate growth fluctuates between 95 and 105. Since 2000, the index has averaged ~102. The index mirrors economic activity and shipping rates
Movements in the real estate climate index closely mirror China’s economic growth, the housing market, and demand for iron ore and shipping rates. From 2000 to 2007, the average price of houses in China rose 60% in nominal terms (before adjusting for inflation). In real terms, it rose 30%, according to information from The Economist
. If we pit housing prices against average income, they’ve been falling. During the period, 2005 was particularly weak compared to other years, which also reflects in the China Real Estate Climate chart above as a little valley and which has negatively impacted year-over-year growth in shipping rates. When economic growth began to deteriorate in 2008, the climate index also showed signs of weakness. The index fell to 102 (near its 2005 lows) and eventually broke lower, reflecting the sharp slowdown in China’s business growth while other countries slumped into recession. As a result, shipping rates and dry bulk shippers like Diana Shipping Inc. (DSX
), Safe Bulkers Inc. (SB
), Navios Maritime Partners LP (NMM
), Navios Maritime Holdings Inc. (NM
), and DryShips Inc. (DRYS
) collapsed. While the Guggenheim Shipping ETF (SEA
) wasn’t around back then, a similar case could have been said for the ETF. The below-average up-trending climate index is positive for dry bulks
October’s Real Estate Climate Index isn’t particularly strong—likely because China’s current economic growth isn’t as robust as the past. While negative from one perspective, the Chinese government will likely support the sector rather than tighten policies. As long as the Real Estate Climate Index doesn’t fall sharply, consider it a positive for dry bulk shippers. Plus, as new ship deliveries continue to fall, we could see shipping rates rise faster than the Real Estate Climate Index. The difference between the Baltic Dry and Real Estate Climate indexes
Note that while the Real Estate Climate Index and year-over-year growth in the Baltic Dry Index highly correlate to each other, they do differ a bit. For example, in 2010, year-over-year growth in the Baltic Dry Index fell harder and faster than it did for the Real Estate Climate Index. The difference reflects excess deliveries of new ships, which had negatively affected shipping rates despite growth in commodity demand and global trade.