China announced it is shooting for 7.5% GDP for 2014. At the sound of that target, DryShips (NASDAQ:DRYS)and Diana Shipping (NYSE:DSX)are likely celebrating. China is the primary country these days responsible for rising market rates for dry shipping, but something in the announcement may warrant a bit of caution.
The positive side
According to Nikos Roussanoglou of Hellenic Shipping News Worldwide, this is positive news for dry shipping. Though the number is slightly down from the 7.7% GDP growth of 2013, it's still an aggressive economic growth target that, if achieved, would have a large positIve impact.
China growth tends to result in much higher demand for dry shipping volumes. For example, as Roussanoglou points out, China imported approximately 1 billion tons of cargo in 2008, and that figure more than doubled to 2.1 billion in just five years for 2013. The number one commodity in demand for China is iron ore for its production of steel. BIMCO's chief shipping analyst Peter Sand puts it well when he says, "The sheer size of the world's second-largest economy now gives so much impetus to our industry that we have become addicted to China."
Sand emphasizes that support from China is needed to maintain a strong sustainable market. He believes the industry will continue to see balance between supply and demand.
The cautious side
Meanwhile, hedge fund manager and shipping industry expert Jay Goodgal has a different perspective. He believes that the news out of China means supply of new ships in the form of the orderbook is going to continue to escalate. This higher supply will, in turn, depress rates. He points out that decreased supply has been a vital part of the forecast models from shipowners, analysts, and investors, and he believes they have it all wrong.
Within the 7.5% GDP target report, Goodgal points out that China's No. 1 priority is employment. The goal is 11 million new jobs in China, with sights on more. One way to achieve this, according to Goodgal, is to support the shipbuilding industry. New ship orders, he reasons, will increase employment. Shipbuilding supports a vast number of jobs, and these are exactly the types of jobs the Chinese government is trying to create. As a bonus, Goodgal implies, the Chinese government is well aware that if it supports the shipbuilding industry, it will lead to greater global supply and cheaper transportation costs for China.
Goodgal asks, "If this were a poker game, who would have the label of 'sucker' on their forehead?"
Foolish final thoughts
What Goodgal warns sounds like it makes sense, but it may take some time before policies are implemented that increase ship builds that lead to an increase in the number of ships actually delivered. Any new orders in 2014 won't be delivered this year, so it seems like his concern is more for the long term.
Still, the market is a forward-looking beast, so keep a close eye on news of continued new orders, or government policy out of China designed to stimulate new orders. By being prepared for this news in advance of the street, you can avoid possibly being a "sucker," as Goodgal calls it. At the same time, you can potentially enjoy the upside gains in the meantime if Roussanoglou and Sand are correct about a stronger market in 2014
Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.