Weak quarter start for China may be an opportunity for investment in shipping

2013-04-30

As the world’s largest importer of raw materials, China’s manufacturing activity is one of the most important drivers of shipping demand. When China’s manufacturing activity accelerates, demand for imports, such as iron ore and coal, will rise, which often leads to higher shipping rates, benefiting top and bottom lines for shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM) and Safe Bulkers Inc. (SB); the opposite is true as well.

Preliminary manufacturing activity report shows weak start for second quarter

On April 23rd, HSBC”s flash (preliminary) manufacturing purchasing managers’ index (PMI) for China fell to a two months low of 50.5, after rising to 51.6 in March. The latest figure shows continued expansion, as it remains above the key number of 50 (those below 50 suggest contraction). Yet, as data points that are further away reflect the strength of expansion and contraction, April’s number points to a weak start for China’s second quarter.

New export orders, a sub index of the PMI, fell from 50.5 in March to 48.6, suggesting weak global manufacturing activity as U.S.’s economic recovery remains fragile and Europe continues to slump. The press release, accessible from HSBC’s website, also noted a faster decline in input price. Although shipping rates have historically correlated closely to commodity prices, some analysts point to excess supply, rather than demand, as the main driver of lower prices. As price of quantity demand will encourage more buyers, shipping companies may be less negatively affected compared to commodity suppliers.

Market gapped down, but recovered: betting on policies

While the iShares FTSE/Xinhua China 25 Index ETF (FXI), an ETF that tracks the 25 largest companies in the Chinese market, fell on the news, most losses were recovered by midday on April 23rd. The fact that the ETF recovered suggests that people who were pessimistic over the past few months might have sold most of their positions by now. Furthermore, it is an indication that buyers are returning to the market, betting that China will continue to grow, either because the government will step in if economic activity deteriorates further, or the market was too pessimistic.

Outside of China, markets also rose due to bets on interest rate cuts from the European Central Bank (ECB), which will support companies mentioned earlier, such as DRYS, DSX, NMM, and SB. The Guggenheim Shipping ETF (SEA), which invests in major shipping companies world-wide, will probably benefit more than individual companies because the ETF is less exposed to company specific fundamentals. Nonetheless, as May approaches, investors will want to be cautious.

Source from : Market Realist

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