China and the dry bulk shipping industry

Part 2
China and the dry bulk shipping industry (Part 2 of 7)

Why China’s steel production is positive for dry bulk shippers

China’s crude steel production

There are many indicators investors can use to get a perspective of iron ore and coal shipments. One of them is crude steel production. Year-over-year growth in crude steel production is a key factor that drives demand for iron ore and China’s iron ore imports. Higher iron ore imports are positive for dry bulk shipping rates, while lower iron ore imports are viewed as negative. Because production can be seasonal, market participants often present and analyze year-over-year growth.

China Crude Steel Production 2013-11-13Enlarge Graph

October year-over-year output remains solid

In October, we continued to see solid year-over-year growth in China’s crude steel output. The national Bureau of Statistics of China reported steel output of 65.1 million mt (metric tonnes). While output fell slightly from September’s 65.4 million mt, it remains significantly above 60.0 million mt registered for October 2012. Year-over-year growth fell from 12.90% the prior month to 10.13%. But it remains pretty strong.

The government won’t miss its target

Earlier in the year, investors were worried about the new government’s tolerance for lower economic growth to give it an opportunity to craft and implement reforms. But as growth fell to 7.5% during the second quarter of this year, the government stepped up public projects and rolled out tax cuts for small companies in order to stabilize growth and meet its target of 7.5% set for this year. China recently released its GDP growth for the third quarter, which rose to 7.8%.

The situation isn’t like 2011

October’s data more or less shows stable industrial activity growth in China. We won’t likely see a decline from near 20% to 0% year-over-year, like we saw in 2011 when inflation was soaring. Month-over-month weakness likely suggests a slowdown of industrial output as we enter the colder season, rather than lack of demand.

The recent reform summit report was quite vague, as most had pointed out that this is quite common among the Chinese government. Yet, as more details emerge about the reforms, the stock market is rising. If there’s one key takeaway from the summit report, it’s this: although China intends to elevate private companies to a more level playing field, as with the state enterprises, it seems like control over state-owned-enterprises will be maintained. While this might look negative, it isn’t—it likely reflects the government’s need to support economic growth over the next few years before consumption drives the country’s business activity more.

Connection to dry bulk shippers

If one thing is clear, it’s that reforms will take a while to work through. China is going through reforms step by step rather than making significant changes, highlighting the difficulties it has with a large population’s vested interest in the previous economic model. But as long as growth momentum doesn’t fall below 5%—near the lows of mid-2012, when industrial output also bottomed—steel output data should support iron ore demand and dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), and Navios Maritime Holdings Inc. (NM) as well as the Guggenheim Shipping ETF (SEA).

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