Why the Chinese government could support dry bulk shippers

Market Realist

Dry bulk shippers are silent—but silence is golden (Part 7 of 10)

(Continued from Part 6)

Domestic steel price near historical lows

Here’s an interesting chart that I showed you last week. Domestic hot-rolled steel price in China currently sits at 3,474, down from 3,482 renminbi per mt (metric tonne) on October 24. About seven weeks ago, steel prices stood at ~3,650 renminbi per metric tonne. The decline in steel price reflects a looser supply-to-demand balance. Either supply grew more than demand, or demand weakened. If we follow steel price through the last ten years, it has bottomed near 3,400 renminbi per mt.

China Domestic Hot Rolled Steel Spot Average Price 2013-10-31

Commodity prices, economic activity, and shipping rates

Commodity prices generally move together with economic activity and shipping rates. When prices for materials such as steel, iron ore, coal, oil, and copper rise, it’s often due to higher growth in demand than supply. This also means higher shipments, which have a positive effect on shipping rates. So, when commodity prices are rising, it’s often an indication that shipping firms’ fundamentals will benefit from higher rates. On the contrary, when prices fall, they often spell a negative for dry bulk shippers. This isn’t always true, of course, which we explained in articles related to iron ore prices.

The steel industry is important to the government

Because the steel industry is rather important to China’s industrial sector and employment growth, a price of 3,400 renminbi may be the minimum that the industry is trying to support. If prices do fall below this figure, it would likely mean poor economic growth. Surely, the government doesn’t want this to happen if it can avoid it, or it will have to face layoffs as steel plants cut production. This could lead to social unrest. This happened in November 2005, October 2008, and September 2012.

What does this mean for dry bulks?

This means if the government or central bank’s power isn’t constrained, it will likely support infrastructure development and steel demand over the medium to long term. This would be positive for dry bulk shippers like DryShips Inc. (DRYS), Navios Maritime Holdings Inc. (NM), Safe Bulkers Inc. (SB), and Diana Shipping Inc. (DSX) over the medium to long term. The Guggenheim Shipping ETF (SEA) will also benefit from this. In the short term, sharp price declines could strike fear among investors.

Continue to Part 8

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