China is still growing but at slowing pace according to latest PMI indices, which suggest a cooling of the manufacturing sector is ongoing but the sector as such is still expanding. This development, should it be permanent, is on course to have repercussions into the demand for shipping tonnage going in and out of China.
China Manufacturing purchasing managers’ index (PMI) released on 1 July by HSBC and Markit Economics fell to 50.4 in June, from 52.7 in May. Meanwhile a government PMI showed a slowdown to 52.1, from 53.9. Both of them are indicating that manufacturing grew, but at a slower pace as compared to the month before. Several key sub-indices from the Markit survey fell below 50 (a reading above 50 indicates growth), including output, new orders, new export orders, and both input and output prices. Prices coming down are reducing the overall inflation pressure on the economy and thereby the risk of overheating is coming a bit off.
The indices were expected to drop as policies to curb lending to the red-hot property market continue to impact manufacturing negatively coupled with the European debt crisis spreading bad sentiment on business and bringing worries as to the sustainability of European recovery.
Shipping analyst at BIMCO, Peter Sand says: “a more modest rate of growth in this leading indicator might affect global shipping sentiment and spread worries that China may be less of a driver in coming months than what we’ve been used to following the strong stimulus-driven recovery in China”.
Source: BIMCO, CFLP, HSBC/Markit
Repercussions on shipping:
Slowing growth in the manufacturing sector is generally bad news for dry bulk, tankers and container shipping segments. As construction is an important part of manufacturing, dry bulk demand could slow down further in coming months, as if the last month has not brought along enough downturn for the BDI, recording year-low at 2,280 on 2 July, with the Capesize segment being mainly responsible for the drop.
In the container shipping industry a lot of tonnage has been reactivated on the back of stronger than expected demand in the first half of 2010. Just last week AXS reported that the idle capacity had dropped from 1.51 million TEU on 1 January to 0.35 million TEU by the end of June. This is seen as largely due to the higher-than expected recovery in demand in the first half of the year and to the impact of extra slow steaming (ESS), which has absorbed an additional 0.32 million TEU in six months. But with new export orders in contraction and the peak of the inventory cycle behind us - a resumed pressure on the rates could develop as the supply-side seems to grow more than the demand-side in coming months.
Particular focus on exports:
A slower growth of new export orders in recent months in part reflects a peaking in global trade flows, which is in turn being driven by the inventory cycle. While still supportive of growth, the temporary stimulus to manufacturing created by the restocking of factories has shown signs of fading in recent months.
On a global basis PMI data also illustrate how the slowing in exports has been led by China and other Asian export-oriented emerging economies. Export growth from China slowed for the fourth consecutive month in June to the weakest in 14 months, with an index reading of close to 48 (below 50 being an indication of contraction).
Following the release of data, Chinese Statistical Bureau stated that China’s export outlook is “grim” as shipments may be hurt by a slowing world recovery, rising trade frictions, Europe’s sovereign debt crisis and cuts to export tax rebates.
The turnaround in trade since the depths of the global recession has been nothing short of extraordinary. This resurgence has been a key feature of the recovery, but signs are emerging that expansion of international trade has peaked and is now slowing.
“The shipping industry in general, has benefitted a lot from China’s swift recovery. China has been recovering tremendously fast and is currently growing it’s GDP by more than 10% on an annual basis. To prevent the economy from overheating the government has taken some measures targeting a stable and sustainable expansion of the economy. The slowdown of the manufacturing PMI signals this. However, the manufacturing sector must continue to expand if China is going to remain the big driver for shipping as well as for the world economy away from a looming double-dip,” adds Peter Sand.
Note that: other important indicators for the world economy and the shipping industry will be published in coming days e.g.: Tuesday US: ISM Service, Thursday EU: ECB Monetary policy (interest rate) and next Monday: Chinese import and export figures. BIMCO Shipping analysis will follow up on these numbers– so stay tune.
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