With Metals Demand In Focus, What Is The New Normal for China?

Continued from Part One.

So as this article asks, what is the new normal for Chinese growth?

Beijing said earlier this year that 7.5 percent would be the average for this year; that has probably been undershot and will come in a 6.5-7.0 percent rate by year end.

Still substantial and with inflation low and unemployment steady, Beijing’s relatively muted response to the slowdown can probably be explained by a combination of imminent regime change and a sanguine belief that once global growth, particularly European growth, finally picks up, China will likewise see a pickup in export activity.

The most recent figures, however, suggest matters may get worse before they get better. That purchasing managers’ index mentioned in Part One has sub-indices that make interesting reading.

The employment sub-index in the PMI fell to 49.1 in August from 49.5, suggesting that manufacturers have shed more jobs. If this becomes a trend, Beijing may feel pressured to do more than the 25 new urban rail projects announced this month or the easing of first-time buyer restrictions recently announced.

New orders also declined, dropping to 48.7 from 49. The reading for export orders was particularly weak, remaining at 46.6 for a second straight month, suggesting recent export growth of just 1 percent, the lowest since May 2009, is likely to continue.

So what can we conclude from the current numbers? Even the top end of some analysts’ forecasts looks optimistic at 9.5 percent growth, the bottom end of the range at 7 percent is more likely and China may undershoot that this year.

Metals demand is slowing significantly, more because of overstocking than a drop in growth — while growth remains positive, so will metals demand — but across a wide range of industrial metals, China has too much inventory, and that glut will need to be worked through before any significant uptick in demand becomes evident.

Even then, demand growth will be more modest going forward than was the case in 2009-11. Meanwhile, we will continue to carefully monitor those PMI numbers for weakness.

Outright deflation is very unlikely, but with so much metals demand coming from China, consecutive quarters of slowing demand could herald yet lower prices in spite of producers’ cost of production.

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