Industrial profits cool but continue to grow positively for shipping

Growth in industrial profit often reflects economic growth. When economic activity rises, so does demand for industrial goods. Higher demand leads to more business which, in turn, leads to higher earnings and free cash flows. To support higher demand, firms will purchase more raw materials, which tends to increase imports. Because China accounts for the bulk of global trade volume, rising industrial profit is often positive for the dry bulk shipping industry.
Industrial profits growth cools from first two months
The latest data from the National Bureau of Statistics of China shows that industrial profits during the first quarter of 2013 grew by 12.1% compared to the same period in 2012, an indication of improvements in industrial activity since growth bottomed in August 2012. March economic expansion was weak, however, since the first two months of 2013 reported a larger increase of 17.2% over the same period in 2012 . The weaker economic expansion in March was in line with a surprisingly lower industrial production growth.
Mining and washing of coal, a raw material used to generate electricity or produce steel, stood out the most from the National Bureau’s press release. Revenue for the industry fell by 2.6% year-over-year while profits fell by a larger amount of 40.3%, driven by the relative cheapness of imported coal that attracted domestic customers to purchase less from domestic suppliers.
Industrial profits outlook for the year
Industrial profits should continue to grow this year. But it will unlikely be as robust as previous years as China slowly transitions itself from an industrial driven economy to a consumption based economic model. While there are concerns regarding the strength of China’s recovery since the government recently moved to cool down property prices, policymakers will unlikely tighten economic policies to the extent that recovery collapses.
Dry bulk shipping companies, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Navios Maritime Partners LP (NMM) and Safe Bulkers Inc. (SB), will benefit from continued growths in industrial profits and economic activity. This will also affect the Guggenheim Shipping ETF (SEA), which is a diversified ETF that invests in global shipping companies engaged in the transportation of dry bulks, oil and other industrial goods.
Source: Market Realist