China PMI flashes amber signal for metals2 min read . Updated: 04 Sep 2018, 11:32 AM IST
Fears of a slowdown in the Chinese economy and the impact of the ongoing US-China trade war have made investors edgy
The China PMI (Purchasing Managers’ Index) data indicates that concern around industrial metals, especially the non-ferrous kind, may have some basis to it. China is the most closely watched country for signals that could affect commodity prices. Fear of its economy slowing down and the impact of the ongoing trade war with the US have made investors a bit edgy.
The August Caixin China General Manufacturing PMI reading at 50.6 was lower than July’s 50.8 and was also the lowest in 14 months. Now, this may seem surprising considering that in steel, for example, production is robust. In July, crude steel output rose by 7.2% from a year ago, according to the World Steel Association.
Supporting this, the China PMI data does show that manufacturing output in August rose at the fastest pace since January. The problem is that demand conditions weakened, new orders rose at the slowest pace since May 2017 and exports fell for the fifth successive month. Concerns on soft demand and US-China trade war have weighed on sentiment.
If China’s output remains steady but demand at home and abroad does not revive, production will have to be cut or else the surplus will head for export markets, leading to weaker prices. That’s a risk for commodities.
What about some other large economies, such as the US or the eurozone, which could have shored up demand? The news does not get better. The IHS Markit Flash US Manufacturing PMI came in at 54.5 in August, down from 55.3 in July and the lowest since November. Output growth slowed and so did business growth. The eurozone provided no consolation. The IHS Markit Flash Eurozone PMI at 54.6 was lower than 55.1 in July and was at a 21-month low. Future expectations of business activity fell to a 34-month low in manufacturing, due to cooling demand, higher prices and rising political concerns.
Two large economies and one big economic region are flashing warning signs. This lends weight to the fear that economic growth may turn slower in the second half of 2018. How companies respond to this developing situation will determine the outlook for metal prices in the rest of 2018 and going ahead, in 2019 as well.
For now, the BSE Metal index does not display any fears. Domestic demand conditions are good and a depreciating rupee means better realizations even as their costs don’t increase as much. A sharp fall in global commodity prices is the main risk that can turn the tide against them.