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Why dry bulk indicators suggest a positive outlook for investors

Part 4
Why dry bulk indicators suggest a positive outlook for investors (Part 4 of 8)

Why a drop in China’s real estate sales affects shipping companies

China’s real estate and shipping companies

China’s real estate sector is a key component of the country’s economic activity, accounting for approximately 20% (steel and construction equipment included) of its gross domestic product or GDP. Changes in real estate activity have historically trended with the overall economy.

With China being the largest importer of iron ore and the second largest importer for the coking coal used to make steel, a key material used to construct buildings in China, China’s real estate activity positively correlates with shipping demand.

China RE &amp; Manu JulyEnlarge Graph

July climate index

For July 2014, China’s real estate climate index stood at 95. This was consistent with last year’s levels and also with the previous month’s levels. The composite index was developed by China’s National Bureau of Statistics. It measures the aggregate business activity for land, capital, and sales of real estate. Figures above 100 show prosperity or economic growth. Figures below 100 mark depression.

July home sales

With continuous efforts by local governments to ease property curbs, China’s home sales slumped 28% in July. Tight mortgage lending outweighed all the efforts, led by weakening prices and demand. This was recorded as the biggest monthly drop in 2014.

For the first seven months of 2014, the value of real estate sales declined 10.5% from last year. Potential buyers are waiting for prices to slide further. Despite all the efforts by local governments to curb property restrictions, homebuyers are preferring to stay away due to expectations of further price falls and rising inventories.

Outlook

Analysts, however, noted that they’re awaiting sales data in August and September, rather than July, for cues on whether a turnaround is in the works. More property developers plan new home launches for sale during the two months. Meanwhile, based on seasonality, the numbers are expected to be positive.

With the real estate market on the edge, the dry bulk shipping companies to watch out for are DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Partners LP (NMM), and Eagle Bulk Shipping Inc. (EGLE). The Guggenheim Shipping ETF (SEA) tracks these shipping companies.

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