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Overview: Why dry bulk indicators are gaining firm ground

Part 2
Overview: Why dry bulk indicators are gaining firm ground (Part 2 of 7)

Why China’s positive PMI supports dry bulk shippers

The importance of China’s PMI

National Bureau of Statistics revealed that China’s official purchasing managers’ index (or PMI) came in at 51.7 for the month of July compared to 51 in June. The report added that the Chinese government has ordered tax cuts for small companies and a speeding up of public investment and fiscal spending. The central bank cut capital reserve requirements for some banks and began re-lending to boost credit.

PMIEnlarge Graph

Since dry bulk shipping demand closely ties to China’s growth, PMI data has a large influence over Safe Bulkers Inc. (SB), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Holdings Inc. (NM), DryShips Inc. (DRYS), and the Guggenheim Shipping ETF (SEA).

Major highlights of the report

Ten out of the 12 sub-indices reflected improvement in July readings compared to the previous month. A sub-index for new orders—a measure of both foreign and domestic demand—edged up to 53.6 in July from 52.8 in June, marking the highest level since May, 2012. July export orders increased to 50.8 from 50.3 in June. With economic activity continuing to improve in July, it reflects that the cumulative impact of mini-stimulus measures introduced earlier is still filtering through.

Hongbin Qu, chief economist China and co-head of Asian Economic Research at HSBC, commented that policy makers are expected to maintain their accommodative stance over the next few months in order to consolidate the recovery.

China’s economy is indicating signs of improvement after a burst of government stimulus measures. A sign of a pick-up in broader economic growth was reflected through a 7.5% growth rate in the second quarter compared to an 18-month low of 7.4% between January and March.

Going forward

Economists commented that China’s manufacturing sector looks good with the government’s efforts to ease monetary policy and speed up infrastructure investment coming into effect. For the third quarter, analysts expect policymakers to maintain the growth momentum with the government having to launch more mini-stimulus steps. Also, the existing measures must be intensified to guarantee a sustained effect.

The real estate sector, which is undergoing a downward correction after a two years rise, is the biggest risk that China is currently facing. However, the government is also undertaking measures to minimize the risks. We’ll discuss the real estate scenario in China in more detail in this series.

Let’s now move on to see how the Baltic Dry Index is performing.

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