China’s manufacturing PMI
Previously, we analyzed the trends in China’s real estate and automobile industries. Now, let’s look at China’s manufacturing PMI, or purchasing managers’ index, which is a key indicator of economic activity. The PMI is released on a monthly basis and is based on the diffusion indices of five components:
- new orders: 30%
- inventory levels: 10%
- output: 25%
- supplier delivery times: 15%
- employment environment: 20%
Analysts track PMI figures closely, which offer crucial insights into future GDP levels. Readings above 50 generally indicate economic expansion, while readings below 50 indicate a contraction.
PMI below 50
The above chart shows the trends in China’s official PMI, which has been below 50 for two consecutive months. This trend reflects a slowdown in the Chinese economy. The country’s demand for all industrial commodities should be impacted as a result of this slowdown.
Interestingly, while the official Chinese PMI in February is below 50, the PMI data released by HSBC and Markit shows that the country’s PMI was above 50 in February.
Negative for steelmakers
A PMI below 50 indicates weakness in China’s industrial sector, which is a negative indicator for the global steel industry. China’s exports of industrial metals like steel and aluminum have increased, as its domestic demand has slowed. Higher steel exports from China negatively impact steel companies like US Steel (X), AK Steel (AKS), Timken Steel (TMST), and Nucor (NUE). The Materials Select SPDR ETF (XLB) is 2.6% invested in Nucor.
Steel exports from China reached record levels last year. In the next article, we will analyze the latest trends in China’s steel exports.