Industrial growth slows but transit will drive oil tanker stocks

Market Realist

Betting on a Chinese stock rebound? Crude tankers might be better (Part 5 of 13)

(Continued from Part 4)

Slowing industrial growth

China’s crude steel production figures remained weak in February 2014, with year-over-year growth dropping to just 0.40%. After robust growth averaging ~10% in 2013, the steel industry’s performance in the first two months of 2014 seem to be much less impressive, showing year-over-year growth of just 4.3%. According to the World Steel Association, China produced 62.07 million metric tonnes of steel in February.

part 2

In February, China produced a total of 383.36 billion kilowatt hours, falling from 477.96  billion kilowatt hours in December 2013. Analysts often look at electricity figures because some believe they’re more transparent. For January and February combined, China produced 816 billion kilowatt hours, which grew 5% year-over-year, according to data from the National Bureau of Statistics.

Like several other indicators we’ve seen, this is quite negative, since electricity output growth averaged ~9% in 2013. While 5% isn’t the end of the world, and the market expects the government to do something, further deterioration would mean a more negative outlook for crude tankers. We’re not expecting a bear market, but it’s something to watch out for.

China Oil Consumption Breakdown

Industrial output

If steel and electricity output growth shows no sign of improvement in March or April, oil consumption and tanker stocks such as Frontline Ltd. (FRO), Nordic American Tanker Ltd. (NAT), Teekay Tankers Ltd. (TNK), and Tsakos Energy Navigation ltd. (TNP) as well as the Guggenheim Shipping ETF (SEA) would be negatively affected.

But keep in mind that steel output and electricity output growth will slow over the long run as China relies less on energy-intensive industries and improvements in energy efficiency continue. Long-term, there will be opportunities to invest in ETFs such as the iShares MSCI China Index Fund ETF (MCHI) as the government puts greater emphasis on profits and the consumer industry picks up. Investors should also note that a more significant part of future oil consumption growth will be cars, not industrials, as the last chart shows.

So how do car sales stack up? See the next article in this series to find out.

Continue to Part 6

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