No wonder Chinese companies are back in commodity markets,
especially base metals and the best indicator of all, copper.
The country's huge manufacturing sector seems to have come
through the mid-year slowdown in activity, judging by the two
monthly surveys of the sector from the Government and from global
The official Purchasing Managers' Index (
) from the China Federation of Logistics and Purchasing rebounded
to 50.9 in August from a 29-month low of
50.7 in July, according to figures out yesterday.
The August figure ended four consecutive months of decline, and
also beat the preliminary forecast of 49.8 for the month by
the HSBC survey.
(Remember a reading below 50 indicates contraction from the
previous month, while a reading above 50 indicates expansion).
And the final HSBC's China Purchasing Managers' Index rose in
August from July, but was still just under the 50 level.
The HSBC/Markit survey was 49.9 in August from 49.3 in July
and 49.8 in the preliminary early report last week.
A notable result in both surveys was a fall in new orders,
especially in the official report.
It showed the new export order index falling to 48.3 in
August, signalling a contraction, from 50.4 in July.
The HSBC survey showed a fall in the new orders sub-index
fell which dipped below 50 for the first time since July 2010,
while the sub-index for new export orders showed a slight
improvement in August but was still under the 50 level for the 4th
month in a row.
In both cases the weak demand from Europe and the US were
Both output and employment in the HSBC survey rebounded to above
the 50 line for the first time in three months.
"These data confirm our view that China will only see growth
moderation in the coming months, rather than a hard landing," said
Qu Hongbin, an HSBC economist said in a statement.
HSBC's survey says at the current level, China's industrial
production is running at a 13% to 14% range, where it has been for
most of the year.
With no sign of a further contraction in manufacturing and solid
domestic demand, it's no wonder Chinese buyers have appeared in
commodity markets in the past month to take advantage of the big
price falls in early August.
As a result copper prices up 10% in the past three weeks,
iron ore prices at three month highs and coal prices are still
Copper and iron ore prices are the best indicators of Chinese
sentiment about economic growth.
China consumes 38% of the world's copper production, and it
produces around 46% of monthly steel output, absorbing by far the
greatest proportion of sea traded iron ore shipments from
Australia, India and Brazil: imports are running at well over 50
million tonnes a month at the moment.
China's return to the copper market is a reversal of
the first half of this year when consumers ran down
stocks and cut purchases and imports as the central government
tightened credit and lifted interest rates to cool the economy.
As the two PMI surveys show, Chinese industrial production has
stabilised around an annual growth rate in the range of 13 to
Copper prices fell to an 8-month low of $8,446 a tonne in
the commodity sell off in early August, but since then prices
have risen more than 10% to $US9,275 a tonne on the LME overnight
on Wednesday as Chinese buyers again appeared to buy at these
Comex copper in New York has made similar gains in the closing
fortnight of August, but still ended the month with a loss of 6.3%,
which seems to have been enough to tempt Chinese buyers back into
China's net copper imports in the first seven months of this
year fell 37% from the same period in 2010 (as global prices topped
at all time highs well above $US10,000 a tonne on the London Metal
Exchange) as consumers cut their purchases.
Iron ore imports plunged to 47 million tonnes in February
(helped by holidays), but have bounced back to the 54 million tonne
level as daily steel production hovers around the 1.9 million
tonnes a day mark (It hit an all time high of just over 2 million
tonnes a day in June and a record monthly total of more than 60
As we pointed out last week in the Weekly, iron ore, the
other great indicator (well, it's steel, more accurately) continues
to enjoy solid prices, despite forecasts of a decline in the third
quarter and half year.
In fact world spot iron ore prices hit three month
highs last week and spot contract prices will run at those
levels until the end of the year.
Reuters forecast this week that the likes of BHP Billiton, Vale
of Brazil and Rio Tinto will keep global iron ore prices steady in
the 4th quarter.
"Based on Platts index prices for June to August, which top iron
ore miners such as Vale and Rio Tinto use in fixing fourth-quarter
contract prices, the 62-percent grade averaged $175.63 a tonne,
cost and freight, down marginally from $176.96 in March-May, the
basis for third-quarter pricing," Reuters said (All US
"Contract prices jumped 20 percent to a record $179.24 in the
second quarter, based on Platts index prices for December-February,
as booming demand from top consumer China helped spot prices surge
to a record of nearly $200 a tonne in mid-February.
"Platts-based spot prices averaged $179 in August, up from
$175.26 in July, amid weakness in other commodity markets fuelled
by worries over a struggling U.S. economy and a crippling debt
crisis in Europe."
And a report on the Xinhua newsagency website this week said
that China's steelmakers saw their profits dented by surging
iron ore prices in the first half of the year, according to
"Twenty-seven listed Chinese steel producers released their H1
results as of Monday night. Their combined net profits slumped 15.7
percent year-on-year to 9.98 billion Yuan (1.56 billion U.S.
dollars), according to Wind Information, a Shanghai-based financial
"Of the 27 listed steel companies, 16 reported lower profit
margins, accounting for 59.3 percent of the total, the Economic
Information Daily quoted an unnamed steel analyst from CITIC
Securities as saying on Tuesday."
China imported 334 million metric tons of iron ore in the six
months to June, up 8.1% on the same period last year,
according to official data. The average price for iron ore
increased by 42.4% year-on-year to $US161 a tonne.
China's steel output rose 9.6% year-on-year in the first half to
350 million tonnes, but the country's Ministry of Industry and
Information Technology said the industry's profit margins dropped
to 2.42% in the first five months, the lowest in for more than five
Steel output has seen little impact so far from the government's
tighter credit conditions, power shortages and attempts to cut
pollution and energy consumption.
A senior executive from Rio Tinto yesterday forecast the iron
ore boom would continue for a while yet. He told a conference
in Perth that global demand would rise by 100 million tonnes a
year for the next eight years, meaning production will almost
double in that time.
The resources boom will go on and on, if that's the case.
Copyright Australasian Investment Review.
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