Assessing overall economic activity is just part of the analysis required to understand the fundamentals of dry bulk shippers. Investors in dry bulk shipping companies or the Guggenheim Shipping ETF (SEA) would be better prepared and positioned if they also followed indicators pertaining to the steel, iron ore, and coal industries.
Steel by end-use
According to Morgan Stanley’s “Global Metal and Mining” presentation published in 2011, a large percent of China’s steel is used for property, infrastructure, machinery, and autos. These four end users make up roughly 88% of China’s steel. Note that a significant amount of spending on transportation infrastructure is also embedded within “infrastructure.” Since affordable properties and urbanization plans are national interests, government policies have important implications for dry bulk shippers as well.
For investors, construction, production, and sales activities for properties and autos are valuable metrics that provide more detailed look at economic activity. Prices of real estate assets and real estate climate indexes, whose rising figures often point to an uptrend in economic growth, are also published by the National Bureau of Statistics. (We’ll discuss more details on how prices affect shipping companies in the next part of this series). For a more forward-looking indicator, investors may consider following investments in real estate development.
Inventory and production
Prospective investors should also keep in mind that higher economic activity isn’t the only driver of dry bulk shipments. Inventory levels for iron ore and coal, high or low, could also affect purchase behavior and dry bulk shipments.
As hinted at earlier in the first few articles of this series, production increases from seaborne suppliers like Australia and Brazil will also affect dry bulk shippers. Basic economics will say that if the supply of a commodity increases, lower prices will result in higher quantity demand. Shifts in supply regions could also lead to higher demand. For example, if China is running out of iron ore domestically, then it will have to import more in order to meet domestic demand.
Purchase behavior can also change based on price arbitrage (the topic of the next article in this series).
Note: this series is a must-read for investors in companies like DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Holdings Inc. (NM), Navios Maritime Partners LP (NMM), Safe Bulkers Inc. (SB), Star Bulk Carrier Corp. (SBLK), Baltic Trading Ltd. (BALT), and Knightsbridge Tankers Ltd. (VLCCF).
© 2013 Market Realist, Inc.
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