The dynamics of global oil trade and demand for crude tankers (Part 5 of 8)
The significance of Chinaâ€™s PMI and tanker demand
China, along with the United States, is another country that tanker companies are keeping their eyes on. As one of the fastest-growing countries in the world, with a population four times that of the United States, Chinaâ€™s oil imports have been growing at low double digits over the past four years. One indicator thatâ€™s often relatable is the countryâ€™s manufacturing PMI (purchasing managers index). When the PMI rises, it often suggests higher economic growth, which drives oil demand and imports. Conversely, when the PMI falls, investors often see it as a negative. Itâ€™s published on the first day of each month. Letâ€™s explore its relationship to oil consumption.
Chinaâ€™s manufacturing PMI rises to 16-month high
Chinaâ€™s manufacturing PMI rose from 50.3 in July to 51.0 in August 2013â€”the highest level seen in 16 months. According to the latest data from the DOE (Department of Energy), Chinaâ€™s oil consumption grew by just 2.72% in July. Just a few months ago, investors have been afraid of uncertainties with Chinaâ€™s economic slowdown. Analysts often perceive PMI figures above 50 as expansion, while levels below 50 often suggest contraction. The farther the numbers are from 50, the stronger the strength of expansion or contraction.
Itâ€™s important to know that the index is a semi-sentiment index, in which the Federation of Logistic and Purchasing sends out surveys asking companies whether activity is improving, unchanged, or deteriorating, rather than actual data, based on factors such as new orders, production levels, supplier delivery time, raw material inventory, and employment. As the PMI has historically led year-over-year oil consumption, we could see oil demand rise later this year.
The increase in PMI in August was driven by higher levels for every major component of the overall index. New orders rose to 52.4. Production rose to 52.6. Supplier delivery time quickened (rose) to 50.4. Raw material inventory rose to 48. And employment grew to 48.3. Out of the five main components that make up the main index, supplier delivery time was the only negative. A quickening in supplier delivery time is unfavorable, contrary to what most people may think, since it means less traffic. The business sentiment, a sub-index thatâ€™s not part of the main index but also worth noting, rose for the second straight month to 59.4. This is the highest level since April this year.
But China isnâ€™t likely to soar
Despite the recent improvements in Chinaâ€™s manufacturing sentiment, as the government expedited public projects and pushed policy to help small businesses, itâ€™s unlikely that its economy will recapture its high-single-digit or double-digit growth again. But with GDP falling to 7.5% recently, hitting the governmentâ€™s annual GDP growth of 7.5% for this year, itâ€™s unlikely that economic growth will slow down significantly. This bodes positive for tanker demand and rates to an extent, which is positive for shares of tanker stocks like Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Ship Finance International Ltd. (SFL), and Teekay Corp. (TK), as well as the Guggenheim Shipping ETF (SEA). But investors shouldnâ€™t expect oil demand to grow more than 7%, like it did pre-2011.
Browse this series on Market Realist:
- Part 1 - The dynamics of the global oil trade and demand for crude tankers
- Part 2 - Oil firms focus on production development in the United States
- Part 3 - U.S. oil production could slow in 2014, benefiting crude tankers