China PMI Figures Down; Iron Ore Prices Damp, Coal Imports Up

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Reaction to the HSBC and Markit Economics China Flash Purchasing Manager’s Index has been broadly negative, signaling a sell-off in the Shanghai Composite and metals prices, according to reports in Reuters and by Standard Bank.

The preliminary reading for the PMI was 50.4 in February, against expectations of 52.2, itself revised downwards from an earlier prediction of 52.3. Although still positive, this comes on top of results for China’s economy showing growth of 7.9 percent over the last 3 months of 2012, the weakest annual expansion for 13 years.

Other evidence – including iron ore prices and coal import trends – is mixed.

In spite of low iron ore stocks at the ports and weather disruption to shipments from Western Australia, iron ore prices have not risen as one might expect. Both iron ore and steel prices in the domestic market are, according to the MetalMiner IndX℠, only slightly up from numbers at the beginning of the year – so slight as to be statistically flat.

Such lack of price pressure when external factors should be stimulating a rise suggests demand in tonnage terms is not as strong as expected.

Bloomberg, however, recently reported shipping rates for Capesize vessels to China are expected to double from US$5,088/day currently, according to consensus estimates, predicated on rising iron ore demand. Iron ore shipments account for 75 percent of single-voyage Capesize cargoes, illustrating the risk in taking Capesize freight rates as a reliable indicator of global trade; the focus is narrowly on iron ore.

Chinese coal imports in January, however, were up 54 percent year-on-year increasing to 25.2 million tons, while metallurgical imports totaled 7.1 million tons, an increase of 3.7 million tons or 107.3 percent year-on-year.

For coal imports to be rising so strongly with iron ore remaining flat seems contrarian until one looks a little deeper.

Domestic coal production has been severely restricted as the government seeks to limit small private mines in preference to large state enterprises. There are good reasons for this: China’s safety record is the worst in the world, and only by applying proper corporate safety procedures is Beijing going to turn the situation around. Meanwhile, Australian and Mongolian coal miners are benefiting with rising demand.

It should be said that growth remains positive and the Chinese New Year often distorts results, falling as it did in February this year; one month’s PMI numbers should not be viewed as too gloomy. The reality is China’s growth is going to be more moderate due to an internal focus on consumption that Beijing is trying to engineer, in addition to lackluster demand for exports.

today's metal prices - MetalMiner IndXOne swallow does not a summer make, and one month of poor PMIs does not a faltering economy prove – but watch those iron ore and steel prices going forward; they are an indicator of investment activity and for China, that’s a significant indicator for the economy as a whole.

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