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World manufacturing grows just slightly, negative for oil shipping

Xun Yao Chen, Industrials Analyst

Global manufacturing activity is a leading indicator for oil shipments, because oil demand highly correlates with global manufacturing activity. So when global manufacturing activity rises, shipping rates benefit from higher oil shipments, which supports revenue and earnings for tanker firms. However, when manufacturing activity falls, shipping rates are negatively affected.

JP Morgan Global PMI

June 2013 figures for the JP Morgan Global Manufacturing Purchasing Managers Index (PMI)—which is a survey-based index that asks manufacturing companies questions such as where production is compared to last month and last year—stood unchanged from last month at 50.6. The number 50 is often seen as a magic number that separates economic expansion and contraction. Figures above 50 suggest economic expansion, while those below point to possible economic contraction. It’s also important to know that the strength of expansion or contraction increases as the figures move away from 50.

Economic activity worldwide

The last five months of data point to a weak growing economy. According to Markit’s report, June data was positively supported by activity in the United States, Japan, the United Kingdom, Russia, Switzerland, and Mexico, while China, Taiwan, South Korea, and Vietnam all reported contraction. Europe, on the other hand, continued to show some improvements in its contraction. Economic activity in the United States, the world’s largest economy, has been stronger than others due to a recovery in the housing market, which was driven by the Fed’s asset purchase program, which brought interest rates to a record low. Japan is also showing improvements because of the lower yen, which makes Japanese goods much more competitive in the global market. China, which has a significant impact on its neighbor countries, was dragged down by the government’s tolerance of lower economic growth, weak global economy, and soaring property prices. 1

Forward outlook

Looking forward, global manufacturing activity will continue to be weighed down by Europe and China’s slower economic growth (which is natural while China’s economy matures and the government tolerates lower growth). Given an elevated supply growth, this pressure would be negative in the short to medium term for tanker companies such as Teekay Corp. (TK), Tsakos Energy Navigation Ltd. (TNP), Ship Finance International Ltd. (SFL), Teekay Tankers Ltd. (TNK), Nordic American Tankers Ltd. (NAT), and Frontline Ltd. (FRO). The Guggenheim Shipping ETF (SEA) would also be negatively affected. Nonetheless, if these companies survive the current depressed market (see Shipping rates for tankers continue to fall, negative for earnings), they will positively benefit from a continuation in economic growth over the long term.

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  1. Investors should also know that an index level higher than 42, over time, is considered the benchmark for economic expansion.

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