China’s manufacturing activity and shipping
China’s manufacturing activity is a key driver for shipping companies. The country’s trade volume drives the bulk of the global shipping industry. The industry engages in the transportation of resources like iron ore, coal, and oil. When China’s manufacturing activity increases, it’s generally favorable for shipping companies.
China’s PMI is the lowest since April 2014
China’s HSBC manufacturing PMI (purchasing managers’ index) fell to 48.9 in April. This is the lowest level since April 2014. The HSBC PMI came in at 49.6 for March and 50.7 for February. The number was also weaker than the flash PMI of 49.2. The median estimate was 49.4. Numbers above 50 indicate expansion, while numbers below 50 suggest contraction. A reading of 50 shows no change.
According to Annabel Fiddes, an economist at Markit, “China’s manufacturing sector had a weak start to Q2, with total new business declining at the quickest rate in a year while production stagnated.”
Reading below 50 is negative for shipping
Manufacturing activity has been weak in China for a number of months. A reading below 50 indicates contraction. This doesn’t bode well for the already depressed dry bulk carrier market—including companies like Dryships (DRYS), Eagle Bulk Shipping (EGLE), Golden Ocean Group (GOGL), and Star Bulkers (SBLK).
The Guggenheim Shipping ETF (SEA) generally follows the Dow Jones Shipping Index. It’s also negatively impacted by contraction in China’s manufacturing sector. Golden Ocean Group accounts for 4.9% of SEA’s holdings.
In contrast, the SPDR S&P Metals and Mining Index (XME) gives investors exposure to the diversified metals and mining space.