Even as nations in the West show signs of slowing economic growth, those in the developing world are cruising right along. As emerging nations in Asia continue their upward momentum, their thirst for commodities and other raw goods seems to know no bounds. As these developing countries continue to grow, increase their incomes and build out their infrastructure, more and more raw materials will be required to sustain that growth. A thirst for wheat, iron ore and coal, along with other commodities, can lead to long-term opportunities for investors not only in the prices of these commodities, but also in how they are shipped around the world.
Tutorial: Commodities 101
Shipping Rises From the Dead
One of the sectors absolutely decimated by the financial crisis was global shipping. Stocks in the sector saw their share prices plummet as the global slowdown reduced demand for raw materials. But with economic growth now returning to many emerging markets, things may be looking up for the shippers. The Baltic Dry Index has recovered from is recession lows and the HARPEX shipping index, which measures the price to ship containers, has also rallied over the previous weeks, doubling since May. Analysts estimate that seaborne trade in commodities will expand 7.6% this year. (This index can provide insight into economic growth and production, but it has its critics. To learn more, see The Baltic Dry Index: Evaluating An Economic Recovery.)
Chinese demand for raw commodities has also had its hand in helping the shippers. Chinese imports of iron ore, crucial for infrastructure, rose 8.7% to 51.28 million metric tons in July, which is up from the previous month. Similarly, analysts predict that imports of raw sugar may surge by 42% in 2010 after domestic output has fallen for the second straight year and demand continues to increase. The nation is also set to increase its imports of primary aluminum in 2011 and 2012 because domestic producers are unprofitable at current prices. These increases in imports are supporting strong numbers from Chinese port operators. Most recently, Cosco Pacific reported an 82% jump in its first half net profit compared to last year's figures. (For background reading, check out Investing In China.)
Prime exporter Hong Kong is riding a wave of growth as other countries in Asia are experiencing exponential economic development. Export shipments to other Asian nations grew 27.4% from a year earlier and were worth nearly $34.4 billion.
Seaworthy Options for a Portfolio
All of this recent bullish export/import activity underscores the long-term trends in global shipping. Raw commodities and finished goods are flowing toward Asia with increasing fervor. Over the short run, shipping may experience choppy waters, but over the long haul, the theme warrants investment.
As an over-arching play on the long-term growth in emerging markets and shipping, the Claymore/Delta Global Shipping ETF (NYSE:SEA) follows 30 companies within the maritime shipping industry. These include top holdings in Navios Maritime Partners (NYSE:NMM) and Ship Finance International (NYSE:SFL). Another key feature is that the ETF has nearly a 38% exposure to Asia's hot spots of Singapore, Japan, Hong Kong and China. While Greek stocks are the second-largest weighting behind the U.S., investors shouldn't worry too much as almost all of shippers' revenues comes from non-domestic sources. SEA operates with an expense ratio of 0.65%.
Intermodal freight transport involves the shipping of freight in a container using multiple modes of transportation (rail, ship and truck), without any handling of the goods themselves when changing transportation methods. TAL International (NYSE:TAL) and Textainer (NYSE:TGH) are two of the largest owners and leasers of intermodal containers in the world. These companies rent out these containers to end users and collect a fee. These fees add up to big dividends for shareholders. TAL yields nearly 6.2% and Textainer, 3.6%.
Finally, Aegean Marine Petroleum Network (NYSE:ANW) is an interesting play, functioning as a "gas station" to the shippers. The company operates as a marine fuel logistics company that supplies and markets refined marine fuel and lubricants to ships in port and at sea. The company operates around the world and should see growth as shipping increases long term.
While the global credit crisis took the wind out of shipping companies' sails, recent events have given new life to the sector. Longer term, emerging markets' need for more raw materials should continue to strengthen the shippers. Companies such as Baltic Trading Limited (NYSE:BALT) or DryShips (Nasdaq:DRYS), along with the other stocks mentioned here, offer investors a way to play the long-term growth of emerging markets.
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