Dry bulk shippers in second stage recovery (Part 6 of 9)
The significance of Europeâ€™s manufacturing activity
As Chinaâ€™s largest trading partner, exchanging mostly industrial-related goods, Europe has a significant influence on Chinaâ€™s manufacturing activity. Since China is the worldâ€™s largest importer of raw material, lower activity in Europe is negative for shipping companies that transport goods such as iron ore and coal. These two key raw materials make up more than 50% of the dry bulk shipping industryâ€™s revenue. So changes in Eurozone manufacturing activity can have a significant influence on shipping companies.
Well-recognized by analysts as an indicator of manufacturing activity, Markitâ€™s final Eurozone manufacturing PMI (purchasing managersâ€™ index) rose from 50.30 in July to 51.50 in August. The consecutive increase at levels above 50 suggests Europe is in the midst of a sustainable recovery that begun last year.Â Figures above 50 signal expansion, while those below 50 suggest contraction. The further away the index is from 50, the stronger the expansion or contraction.
Among the three large European economies (Germany, Italy, and France), Germany and Italy registered higher PMI figures in August from July. France, on the other hand, stood unchanged and below 50, suggesting country-specific factors were hammering recovery. New orders, export business, and production all accelerated to the fastest pace since May 2011, Markit commented.
A weak and uneven recovery
Since recovering from 44 in July of 2012, as money printing alleviated the risk of a Euro collapse, EU nations have had a wobbly recovery. It wasnâ€™t like the recovery people saw back in 2009, when governments worldwide announced stimulus programs and eased monetary policy. A higher euro, due to the diminishing probability that the euro will collapse, had made European products more expensive, and austerity measures (dragged by fiscal deficits and debts) slowed the recovery process.
Positive influence on dry bulk shippers
The recent trend in PMI for Europe has been encouraging and should have a positive effect on Chinaâ€™s trade. Indeed, Chinaâ€™s August new export PMI rose from 49.0 in July to 50.2 in August. Investors should know that the majority of dry bulk demand growth is driven by China. But itâ€™s encouraging to see that Europe is recovering because countriesâ€™ economies have been quite correlated in the past. This bodes positive for dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM), Navios Maritime Holdings Inc. (NM), and Safe Bulkers Inc. (SB).
Browse this series on Market Realist:
- Part 1 - Why you should look beyond the U.S. market for dry bulk shippers
- Part 2 - Why ship orders fell but remain fundamentally positive
- Part 3 - Construction activity signals dry bulk shipping recovery in 2014