China’s economic growth has historically been led by manufacturing, construction and investments, including the real estate sector which is a key driver of iron ore and coal demand. As China is the major importer of the two raw materials, China’s economic growth generally reflects demand for capesize and panamax ships that are used to hauling iron ore and coal. When China’s economic growth is strong, shipping companies will benefit from higher shipping rates and businesses. But when economic growth falls, it is negative.
Lou Jiwei speaks of below 7.0% growth
On July 12th, China’s Finance Minister Lou Jiwei signaled that China’s Gross Domestic Product (GDP), a measure of economic output, may fall below 7.0% in the second half of the year, which is below the 7.5% official target set by the new government for this year. Historically, led by investments, GDP has grown at an average of 10% over three decades. But that has changed lately as the golden age of investment led boom came to an end a few years ago, and the new government is tolerating lower economic growth for long-term sustainability, in addition to making reforms that will open China up to more competition, urbanization, private enterprises and consumption.
Implication for dry bulk shippers
When China’s economic growth has been strong in the past, imports for iron ore was also strong. When China’s GDP was growing above 10% before 2009, iron ore imports was growing above 10%. Lately, both GDP and iron ore imports growth have stayed below 10%, and is likely to remain that way in the future as China’s economy matures and shifts away from investment-led growth.
Lou Jiwei’s comment points to a negative outlook for the shipping industry. Whether his forecasts will be realized or not has yet to be seen as car sales and real estate activity appears to remain robust, which Market Realist updates on a regular basis. However, his words point to a potential risk because it appears the new government is tolerating lower economic growth. If a 7% economic growth does happen, investors can also expect iron ore import growth to have fallen, which will be negative for shipping rates and earnings. This will affect dry bulk shipping firms, such as Dryships Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Eagle Bulk Shipping Inc. (EGLE) and Navios Maritime Partners LP (NMM).
Visit the industry page for regular updates on key performance indicators that affect the shipping industry: Marine Shipping.
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