China (FXI) (MCHI) is the single largest factor on the demand side impacting the dry bulk industry. The majority of the iron ore and coal carried by dry bulk carriers finds its way to China. Therefore, it is important for investors to look at the drivers shaping China’s steel outlook.
The construction, machinery, and infrastructure sectors together account for almost 80% of total steel consumption in China. In this part of our series, we’ll explore how steel demand from these three sectors could shape up in 2016.
The construction sector is the biggest steel consumer in China, accounting for more than half of the steel consumption in the country. Though real estate indicators started picking up toward the end of the year due to the government’s policy support, the inventory still remains high, which could keep a lid on new construction activity into at least the first half of 2016. After this, the property sector might pick up again, supported by the government’s easing policy. However, this may not be enough to absorb the excess iron ore supply hitting the market in 2016 and beyond.
The outlook for investment in infrastructure remains positive in 2016 as the government needs to add stimulus. Rail capital expenditures accelerated in China toward the end of 2015, and this momentum should continue in 2016.
Airports are also expected to see more traffic growth. Overall, policy support and initiatives such as OBOR (One Belt, One Road) and the public-private partnership rollout should drive infrastructure growth in China going forward in 2016.
China’s Caixin manufacturing PMI (purchasing managers’ index) for December 2015 came in at 48.2, which was below expectations and below November’s 48.6.
As the Chinese economy transitions from a manufacturing-based economy to a service-based economy, manufacturing activity growth may slow down in 2016.
Overall, the demand for steel in China is expected to remain muted in 2016, which should weigh negatively on dry bulk names (SEA) such as Navios Maritime Holdings (NM), Navios Maritime Partners (NMM), Star Bulk Carriers (SBLK), Ship Finance International (SFL), and Diana Shipping (DSX). Investors interested in broad exposure to industrials can invest in the SPDR Dow Jones Industrial Average ETF (DIA).
In the next and concluding part of this series, we’ll see how analysts expect the revenues for major dry bulk stocks to shape up in 2016 and 2017. This can give some idea of the consensus rate expectations.