Why is PMI important?
The HSBC Manufacturing PMI (purchasing managers’ index) for China is a key indicator. It shows what direction the country’s manufacturing sector is taking.
Five major components make up the index:
- new orders – 30%
- inventory levels – 10%
- production – 25%
- supplier delivery times – 15%
- employment environment – 20%
This is one of the most closely watched business surveys. It helps financial institutions, businesses, and investors make more informed decisions.
PMI at seven-month high
China’s HSBC manufacturing PMI was at 50.7 for February. This is a seven-month high. It’s higher compared to the value of 49.7 for January. It’s also higher than the flash PMI reported earlier for February of 50.1. Numbers above 50 indicate expansion. Numbers below 50 suggest contraction. A reading of 50 shows no change.
According to HSBC commentary, “Manufacturers in China saw a renewed improvement in overall operating conditions in February, with output and total new orders both expanding at faster rates. However, latest data indicated that external demand was relatively weak, with new export business declining for the first time in 10 months.”
Although China’s operating conditions improved in February, the improvement is just marginal. Several months of strong data are required to take the economy out of the deflationary pressures.
Manufacturing and iron ore companies
Iron ore demand is closely tied to the manufacturing sector’s performance in China. Although data shows overall expansion, the slower pace of expansion indicates a weaker business environment. This is bad for companies including Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF).
Investing in the iShares MSCI Global Metals & Mining Producers ETF (PICK) is an efficient way to gain exposure to the iron ore sector without having to pick individual companies. BHP Billiton, Rio Tinto, and Vale form 18.5%, 11%, and 2.7% of PICK’s holdings, respectively. The SPDR S&P Metals & Mining ETF (XME) also invests in some of these stocks.