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Must-know: Commodity prices and dry bulk shipping stocks (Part 5: Industrial output and outlook)

Xun Yao Chen, Industrials Analyst

Continued from Must-know: Commodity prices and dry bulk shipping stocks (Part 4: Imports and shipping rates). To start from the beginning of this series, see Must-know: Commodity prices and dry bulk shipping stocks (Part 1: Inflation and steel).

Why shipping rates fell after 2012

The biggest contributing factor to lower shipping rates at the start of 2012 was weaker iron ore imports driven by weaker economic growth, measured in gross domestic product (GDP). As China’s central bank increased interest rates to combat high inflation (which would reduce the flow of money in the economy and decrease purchases and investments), industrial output and profitability fell. Gross domestic product, which was growing above 9%, eventually fell after mid 2011. Although real estate sales held up well until the start of 2012, other indicators—such as the real estate climate index, auto sales, and crude steel output—were all pointing down (see below).

China Real Estate Activity 2013-07-11

Iron ore import and shipping rates outlook

Although China’s producer price index (PPI) remains weak and economic growth could lower, this isn’t necessarily a negative for shipping rates. While the real estate climate index (an indicator for the overall health of China’s real estate sector) has dipped since February, it remains below its historical average of 102 since 2000. Figures above the 100 level point to prosperity, while those below point to stressful conditions. This means the government is highly unlikely to implement policies that will hurt the real estate sector significantly. While some investors may worry about the government’s recent move to cool down property prices, high real estate price growth has historically encouraged construction companies to build more, which will support steel demand and iron ore imports. The amount of land being purchased, a figure that often leads to higher construction activity, also appears to be bottoming.

As auto sales and crude steel output growth continue to remain strong, with a year-over-year increase of ~9.5% in May, year-over-year growth in iron ore imports (which has remained weak this year due to inventory destocking), should continue at a higher rate as traders match crude steel output growth with iron ore import growth, on the condition that prices don’t become overly expensive. Traders also know that starting next year, shipping rates are very likely to rise higher, as the dry bulk shipping industry will see the lowest increase in capacity. This may give traders extra incentive to import more iron ore earlier, which will aid shipping rates.

This increased early iron import would be positive for dry bulk shipping companies, which transport iron ore and coal across the ocean. Some publicly traded names include DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Knightsbridge Tankers Ltd. (VLCCF), Navios Maritime Partners LP (NMM), and Safe Bulkers Inc. (SB).

To see current risks that may negatively affect dry bulk shipping stocks over the next few months, continue to Why China’s interbank rates have an impact on dry bulk shipping companies.

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