Must-know: Why does China’s inflation affect dry bulk shippers?

Market Realist

China and the dry bulk shipping industry (Part 7 of 7)

(Continued from Part 6)

Government and inflation

What the government wants to do is one thing. What the government is able to do is another. In previous parts of this series, we showed that the Chinese government will likely continue to support its industrial sector. It may be one reason why it decided to hold significant control over state-run enterprises while opening the country towards a more privatized economy for other sectors, as were the results of the recent reform summit. One measure that affects the government’s ability to push through expansionary or contractionary policy is the inflation rate.

Inflation in China 2013-11-14

Inflation is firming up

In October, China’s CPI (consumer price index) grew 3.2% from the same month a year ago. This was higher than the 3.1% year-over-year change seen in September. In September, the CPI rose largely because of increased food costs, disrupted by a typhoon. In October, Yu Qiumei, a senior statistician with the National Bureau of Statistics, said that inflation rose mainly because of a rebound of non-food products such as clothing, home appliances, and daily necessities.

The CPI measures the price of a basket of goods that the average household purchases. So, year-over-year changes often reflect a supply shortage, which can be driven by an increase in demand or decrease in supply.

Producer Price Index is low

The PPI (Producer Price Index), on the other hand, fell to -1.5% for the month of October from 1.3% in September. A weak producer price index reflects a weak price increase (sometimes negative) in wholesale prices. This is generally considered negative, because it could reflect weak demand or growth. In a sense, this is true, because China hasn’t been growing as fast as it has in the past, while material costs haven’t risen much due to growing supply. But weak PPI isn’t necessarily bad—especially when it has been improving since September 2012, and increased supply will increase the long-run economic output.

What are the implications?

Because food prices tend to be more volatile, as they’re subject to unexpected supply disruptions, the current inflation rate isn’t so worrisome. More favorable weather next year could bring food inflation down. With higher food inflation in China, while other countries are experiencing falling crop prices or years of low crop prices, grain shipments will rise.

When inflation is on the rise, it’s often a signal that the economy is firming up, which is a positive for 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). Unless we see inflation hit above 4.0%—particularly the PPI—demand for dry bulks will remain solid.

For more information on drivers that affect dry bulk shippers, please visit our last series, Must-know drivers that move shipping stocks up and down.

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