Must-know: Why should bulk shipping investors track inflation?

Market Realist

Why dry bulk shipping sees continued favorable trends (Part 12 of 14)

(Continued from Part 11)

Inflation

Inflation is a key indicator that the central bank follows. Since the central bank has tools to expand and cool an economy, investors should also follow inflation. We can break inflation down into demand pull and cost push types. As the terms suggest, “demand pull inflation” refers to price increase due to increased demand. “Cost push inflation” is driven by high cost. The oil crisis in the 1970s is a common example.

Inflation in China 2013-12-10

Inflation fell in November

In Novembr, China’s CPI (consumer price index) grew 3.0% from the same month a year ago. This was lower than the 3.2% seen in October, easing market fears of policy tightening as policymakers meet this week to outline reform priorities and policies for 2014. The producer price index, which reflects a basket of goods sold at the producer level, rose from -1.5% to -1.4%.

Understanding inflation

Rising inflation is often considered positive if it is a reflection that demand is rising faster than supply. However, the market often becomes cautious when inflation rises above certain rates determined healthy by the central banks, as it raises potential risk of hyperinflation (a much quicker version of inflation). Conversely, a falling inflation rate is sometimes perceived as a negative.

Stable inflation expected

According to a Reuters article, an economist at Xiangcai Securities in Shanghai noted, “Inflation will not be a big problem in the coming months and we expect monetary policy to stay neutral.” Indeed, with prices for several commodities like iron ore, coking coal, and crops down this year, we’re likely to experience limited inflation from China over the next few months.

Increased commodity supply

While slower growth in China is arguably part of the reason producer prices continue to fall year-over-year, lower commodity prices appear to be a contributing factor to weak producer price inflation. So it isn’t necessarily all negative.

Impact on dry bulk shippers

Unless we see substantial supply cuts or a sharp rise in demand, inflation is likely to remain tame. Steady inflation often translates to steady but long-term growth. Current inflation data supports dry bulk shippers like DryShips Inc. (DRYS), Safe Bulkers Inc. (SB), Navios Maritime Holdings Inc. (NM), and Diana Shipping Inc. (DSX) as well as the Guggenheim Shipping ETF (SEA), in our view.

While this might not be very relevant at this moment, reading the inflation rate and central bank policies would have helped investors avoided shipping stocks in 2007 and 2011 when they lost fortunes. So they should be on every investor’s radar.

Continue to Part 13

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