Are Manufacturing PMIs All They’re Cracked Up to Be?

Text "PMI" on wood cube with gold bar and newspaper on the table, economic data concept

Here at MetalMiner, we’re not very big fans of manufacturing PMIs. They tend to overstate trends, and month-by-month data can be misleading. This is especially true when trying to extrapolate medium term trends. That said, when taken in conjunction with metal price movements – which are driven more by actual demand than sentiment – PMI’s can be a useful indicator. We simply want to remind everyone to take them with a pinch of salt.

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Capital Economics’ Take on China’s Manufacturing PMIs

Having given the above caveat, we feel Capital Economics’ reporting on this week’s Chinese manufacturing PMIs is worthy of review. After all, it has strong support in the market’s response to contracting factory output hitting demand. Indeed, iron ore prices edged lower in Dalian. This is largely due to the construction sector downturn and deepening global economic woes. To many insiders, this combination strongly suggests that exports will fall further.

Capital Economics reported two sets of manufacturing PMIs. These included the Caixin and the official figures and one set of service sector PMIs, as the Caixin report isn’t due until next Monday. Both the manufacturing PMIs remained weak in November. Taken as a whole, they averaged a further decline from 49.2 to 48.7. It’s worth noting that anything below 50 represents a contraction.

Chinese map with closed hanging sign, quarantine concept. 3D ren

CE reports that, except for the Shanghai and Wuhan lock downs, this is the lowest combined reading since 2016. Declines in the new orders and new export orders indices point to continued downward pressure on demand, both domestically and abroad. Clearly, this continues to weigh heavily on sentiment. In a particularly worrying development, the suppliers’ delivery time index fell further. This resulted from the rapid lengthening in delivery times last month, as the government’s lock down response to rising Covid infections impacted the transportation of goods.

The surprise is not so much that rising infection rates and localized lock downs have hit logistics, manufacturing, and consumer sentiment. Rather, it’s that output has not been impacted more.

Ultimately, there is a real risk that infection rates will rise in the short to medium term. If this happens, the current policy will demand a return to wider lock downs, further impacting output. Current manufacturer sentiment seems to suggest the industry sees that as a real possibility. With China such a key demand driver for base metals, the recent weak data does not encourage confidence that there will be any price stability in the coming months.

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