In addition to paying attention to US economic indicators, particularly the PMI, unemployment claims, consumer confidence and GDP numbers, metal-buying organizations must now concern themselves with all of these numbers from China. Many of these same indicators from China drive global metal markets and in turn, help explain the rise (and/or fall) of metal prices, particularly for base metals. So we turn to a few news items from this week that may have escaped your radar. The first indicator involves China manufacturing activity, the equivalent of our PMI. Three organizations conduct a survey to measure PMI from China and all three reported “unexpectedly weaker conditions during the month of February. Of course, February also marks the Chinese New Year, so we would expect a slow-down. The question becomes, how should one interpret the data?
According to the China Federation of Logistics and Purchasing, PMI fell from 55.8 in January to 52.0 in February. HSBC’s version of the index fell from 57.4 in January to 55.8 in February. Some might conclude the fall in the index indicates slower growth due to poor sentiment or falling industrial activity. Yet others will point to the slow down as evidence that finally the Chinese government has started to control credit growth and government stimulus. Consider this about China growth during 2009, according to a recent Reuters article:
- Borrowings by local China governments accounted for $556b of loans
- These same local governments also raised $65.9b through bonds
- UBS expects $439b of non-performing loans over the next few years due to borrowing by local governments
- 78/136 bonds issued by local governments do not have third party backing or backing with hard assets
We view the slowdown in numbers as positive, particularly if it means China has sought to gently slow down lending. Broad pendulum swings in any direction cause markets to panic. Despite the slowdown in US and Chinese PMI numbers, according to David Hensley, a director at JPMorgan who told the Financial Times, “Growth is still coming from a broad base and labour markets are moving closer to stabilising. Levels of new orders are rising, and there are signs that international trade is continuing to strengthen.”
When examined from a global perspective, we can see the numbers appear positive and certainly headed in the right direction. Buying organizations will want to keep close tabs on how these trends take hold. As we have reported previously, much of the early 2010 rise in metals prices has already been factored into pricing and now the indicators will need to support that assumption. We’ll keep following these data points closely.