Soros Management opens positions in dry bulk shippers, Q3 2013

Part 4
Soros Management opens positions in dry bulk shippers, Q3 2013 (Part 4 of 5)

2 key points from China’s reform will benefit dry bulk shippers

Will there be demand?

The story of dry bulk shipping growth doesn’t just stop at falling iron ore prices. For iron ore producers to keep expanding projects, they must expect prices to remain favorable when additional capacity comes online. Recent commentaries on currency rates and reforms have been encouraging, and they should positively impact demand for dry bulk vessels in 2014 and 2015.

Renminbi per US Dollar 2013-11-22Enlarge Graph

 

Robust commodity demand should continue

Much of what the public knows about the latest reforms from the Third Plenum meeting—an event where policymakers meet up to discuss the economic reforms over the next decade—has been high-level. As chairman Jan du Plessis of Rio Tinto noted, “The detail… is very high level… therefore hard to gauge what the immediate implications are.” However, he also said, “It contained many positive signals, including the pledge to open up border areas in the interior and support land reform,” suggesting robust commodity demand for the years ahead.

More leeway for the renminbi

On November 22 in Beijing, the People’s Bank of China also said the country won’t benefit anymore from increases in foreign-currency holdings, a sign that policymakers will let go of U.S. dollar purchases that limit the yuan’s appreciation. “It’s no longer in China’s favour to accumulate foreign-exchange reserves,” Yi Gang, the Deputy Governor at the central bank, said. This means an end to normal intervention in the currency market and to broadening the yuan’s daily trading range, while a timeframe for any changes wasn’t provided.

Imports should become cheaper

This change will likely have an appreciative impact on the Chinese renminbi, which would support policymakers’ intention to make the renminbi more tradeable, support a consumption-driven economy, open the country to more foreign capital, and develop Shanghai as a major financial center in the East. This would benefit Australian and Brazilian producers as import iron ores become relatively cheaper to domestic producers, which should be another positive catalyst for dry bulk shippers over the next two years.

The Realist Discussions