Must-know supply and demand dynamics driving dry bulk shipping (Part 5 of 7)
Low economic activity before the Chinese New Year
Despite the decline, the Manufacturing PMI of the Chinese government is still expanding above the threshold, which indicated that the manufacturing industry is maintaining growth.
It’s not a huge disappointment to see a falling PMI on the first month of the year, since China traditionally has low economic activity during the month before the Chinese Lunar New Year, which reduces demand. Shipping rates tend to climb with spring approaching.
High expectations for 2014
It’s true that there’s still some uncertainty in the dry bulk market, but many dry bulk shippers and charterers are anticipating higher rates in 2014. They see steadily growing demand in China for major commodities. Michael Bodouroglou, chairman and chief executive officer of Paragon Shipping Inc., said in an interview this month that China will drive demand in 2014 for dry bulk shipping despite its projected slower economic growth.
A healthier economic environment
China has undertaken an economic growth miracle, but this progress is shadowed by conflicts of interest. Policymakers would like more sustainable development, but their first concern is to maintain a growth rate high enough to keep society stable. The goal of the country’s reform isn’t to cool the economy, but to improve the economic environment so that people can enjoy long-term benefits.
For example, a free trade zone has been launched in Shanghai as a test bed for reforms, some tightly controlled sectors (such as the financial and telecom sectors) will gradually open up, and the “one-child” policy has relaxed in order to dampen the effect of aging.
All of these efforts will benefit dry bulk shippers eventually. Given the current level of Chinese domestic production, a more open domestic market can help stimulate demand for imported goods, since foreign commodities (like iron ore, coal, and grain) are usually cheaper due to operating efficiencies.
Browse this series on Market Realist:
- Part 1 - Why dry bulk shipping closely correlates with the world economy
- Part 2 - Why the World Bank shows China could still expand its trade
- Part 3 - Why China’s manufacturing PMI is the timeliest dry bulk indicator