Iron ore inventory levels of Chinese ports can impact purchasing decisions. Iron ore represents the largest category of product shipment within the dry bulk shipping industry, and most of the shipments go to China. When the Chinese market rises, shipping stocks tend to rise as well. However, when inventory levels are high, importers may postpone new orders.
From September 2012 to November 2012, the Guggenheim Shipping ETF (SEA), which is an ETF that is comparable to the Dow Jones Global Shipping Index, has lagged the popular Chinese ETF: iShares FTSE 25 China Index Fund (FXI). This might be because the inventory levels for iron ore stood near a record high of 100 million tons around the month of September. As economic activity picked up in China since September, more iron ores were drawn from port inventories than were replenished. That has caused the inventory level to fall to near 80 million tons, which was last seen before the Chinese market and the Guggenheim Shipping ETF (SEA) transformed into bear markets during 2011.
However, if the level of inventory drawdowns and imports had continued, Chinese ports would have had no inventory. Thus, it made only sense for importers to begin ordering more, which is reflected in the upward movement of the Guggenheim Shipping ETF (SEA) since December. As long as China’s manufacturing activity grows at the current rate or faster, more iron ores will be imported and SEA should also benefit. This also bodes well for dry bulk shipping companies such as DryShips, Inc. (DRYS), Diana Shipping, Inc. (DSX), and Eagle Bulk Shipping, Inc. (EGLE).