COLUMN-China PMI may not signal rising commodity demand – by Clyde Russell (Reuters India – September 3, 2013)

(The author is a Reuters columnist. The opinions expressed are his own.)

(Reuters) – Commodity producers and traders have no doubt been cheered by the recent recovery in China’s key manufacturing sector, but the boost may be more to sentiment than actual demand.

This is because there is a fairly weak correlation between movements in China’s official Purchasing Managers’ Index (PMI) and imports of key commodities such as crude oil, iron ore and copper. There is a far better correlation between China’s imports and the price of these commodities.

This suggests that while stronger, or weaker, industrial growth helps set the direction for imports, the actual size of the movement in imports is more related to price.

The official PMI rose to a 16-month high of 51.0 in August, beating market expectations for a reading of 50.6, with the breakdown showing better conditions across the factory sector, including the key export orders category.

The rise in the official PMI was supported by a similarly positive reading in the HSBC PMI survey, which rose above the 50-line that separates expansion from contraction for the first time in four months, hitting 50.1 in August.

The HSBC index is more biased toward smaller and medium enterprises, while the official PMI concentrates on larger, state-controlled companies.

Both PMIs appear to be saying that the Chinese economy has turned the corner from a weaker start to 2013 and is once again expanding on the back of increased infrastructure spending and better global economic conditions.

It seems logical that this is good news for commodity producers, as a stronger China generally means the world’s biggest commodity consumer imports more.

But the logic doesn’t really stand the scrutiny of the data.

Take iron ore for example. From the end of the 2008 global recession until the end of 2010 the official PMI was consistently above the 50-mark, with the lowest reading being 51.2 in July 2010.

However, iron ore imports flatlined for much of that period once the initial rally after the 2008 recession was over.

In fact for most of 2010 the trend in iron ore imports was down and they only started accelerating toward the end of the year and the start of 2011, just as the PMI was starting to weaken.

More recently, the official PMI has been meandering in a narrow range near the 50-level, but iron ore imports have been surging, reaching a record high in July of 73.1 million tonnes.

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