China’s April manufacturing eases, but 3 drivers may support dry bulks

As the largest importer of raw material in the world, manufacturing activity in China is one of the most significant key drivers of shipping companies’ performance. When manufacturing activity falls, China will import less dry bulk raw materials, such as iron ore, coal, and grain, to meet demand. This will lower shipping rates or decrease the amount of business for dry bulk shipping firms, which will lead to lower free cash flows and share prices.
Manufacturing expansion eases from March
For the month of April, China’s official manufacturing PMI rose to 50.6, falling from last month’s high of 50.9 (1). Although the latest data points to a sustained recovery, the weaker expansion in April shows that manufacturing continues to be dragged down by property tightening measures and a weak global economy. Lower new export orders, which changed from an expansion of 50.9 in March to 48.6 in April, was the main driver of the lower composite figure.
Three drivers to potentially support shipping
As the Guggenheim Shipping ETF (SEA) follows the China’s manufacturing purchasing managers’ index closely, with a strong correlation of 0.80 since 2010, the ETF may trend sideways for a while. However, investors should watch for three (emerging) drivers that may support shipping stocks:
1.    Demand increase may outpace supply increase in 2013/2014 as supply growth normalizes, which will help shipping rates and share prices of shipping stocks .
2.    European politicians appear to be relaxing their stances on austerity measures given the low inflation and upcoming reelections. The European Central Bank also cut its interest rate last week, with the intention that it will do whatever it can to support the economy, which will aid global demand.
3.    China has room to support an economic recovery as current inflation rate is accommodatin.
Although there are short-term risks, the Guggenheim Shipping ETF and dry bulk shipping stocks, such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB) and Navios Maritime Partners Inc. (NMM), may benefit from much favorable demand to supply balance in the medium to long-term.
1.    The PMI is a measure of economic activity often followed by analysts and traders. Figures above 50 indicate solid expansion while those between 42 and 50 show possible growth; levels under 42 signal a potential recession.
Source: Market Realist