Data Diary

China PMI – bearish for base metal prices

Posted on 03 March 2010

Following up on our note yesterday on the RBA Commodity Price index and the turning down of our pre-pubescent materials sector leading indicator comes a report on the China Purchasing Managers Index for February that was released late last week.

But first to the PMI index (from Standard Chartered Daily Metals bulletin):

China’s manufacturing index reading was well below expectations at 52 — down from 55.8 in Jan and below the consensus 55.2. While this still signals expansion in China’s manufacturing sector, it is the lowest reading since March 2009. This is of some concern (especially on the back of monetary tightening in China). However, we attribute the weakness in the Index to China’s week-long New Year holiday in February.

So to the article by Prieur du Plessis at Investment Postcards from Capetown (click here to go to original) where he published the following charts:

Now putting together historical data for China is notoriously difficult, so we should give a vote of thanks to Prieur (and Plexus Asset Management).

In the context of the recent moves to tighten lending and liquidity in China, the turndown in the PMI could well confirm a change in trend for GDP growth.  That’s not to say China’s GDP growth is about to fall into a black hole – but along with the rolling over of the OECD’s lead indicator (that we discussed here – with the next instalment from the OECD to be published tomorrow) the signs are that economic growth in China has turned the corner.

Secondly, note that the “New Export Orders” index is leading the way.  If GDP growth is to remain around 10%, the impetus is going to have to come internally – which is somewhat contradicted by the recent tightening.

Conclusion

If the relationships hold, base metal prices should continue to come under pressure in the near term (notwithstanding the one day rally in copper after the Chilean earthquake).  Perhaps we should put some more work into our fledging index.