Dry bulk shipping demand is highly dependent on the global economy. One great tool that money managers and policymakers rely on to assess short to medium-term economic outlook is the composite leading indicator published by the OECD (Organization for Economic Co-operation and Development). The components of the composite leading indicators differ from one country another, but common factors include manufacturing inventory orders, financial markets and business confidence surveys. Rising figures suggest higher economic growth, which is positive for dry bulk shipping, whereas falling figures point to lower growth, which is a negative.
Rising leading indicators
The latest data shows that leading indicators continued to rise for the Euro area, the five major developed Asian countries (Japan, China, Indonesia, India and Korea), and the United States in April, suggesting the global economy will continue to recover in 2013. According to the institution, the magnitude of change does not translate to the strength of weakness in economic growth, because of how the index was constructed. Thus, it is best used as an indicator of whether economic activity will be better or worse in the medium-term.
In the past, leading indicators have done fairly well in predicting the start of economic recession and recoveries. Leading indicators for the Euro area and the five major Asian countries have all bottomed during the second half of last year as policymakers loosened monetary policy and some announced stimulus programs to support economic activity. Although economic fundamentals remain weak due to Europe’s austerity measures and China’s tightening of property market, which has had people worried from time to time, OECD’s leading indicator suggests economic activity should continue to recover throughout 2013.
Dry bulk demand
As the global economy recovers, shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM) and Safe Bulkers Inc. (SB), should benefit from higher demand for key dry bulk materials, such as iron ore and coal. Given that policymakers have room to lower interest rate to incentivize people or businesses to borrow more or spend more, leading indicators should continue to rise in the short to medium-term. The Guggenheim Shipping ETF (SEA), which invests in global shipping companies that transport dry bulk raw materials, oil, and other industrial products, should also benefit from higher demand this year.