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China’s Manufacturing PMI Below 50 for 2 Consecutive Months

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China’s manufacturing PMI

Previously, we have analyzed the trends in China’s real estate and automobile industry. Now we will look at its manufacturing PMI, or purchasing managers’ index, which is a key indicator of economic activity. The manufacturing PMI is released on a monthly basis and is based on the diffusion indices of five components:

  1. New orders: 30%
  2. Inventory levels: 10%
  3. Output: 25%
  4. Supplier delivery times: 15%
  5. Employment environment: 20%

Analysts track PMI figures closely, as it can give crucial insights into future GDP levels. Readings above 50 generally indicate economic expansion, while a reading below 50 indicates a contraction.

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PMI below 50

The above chart shows the trends in China’s official PMI. As you can see, its PMI has been below 50 for two consecutive months, which reflects a slowdown in the Chinese economy. The demand for all industrial commodities would 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 show that the PMI was above 50 in February. However, the flash HSBC PMI has fallen to an 11-month low of 49.2 in March. Analysts were expecting the PMI to be more than 50 in March.

Negative for copper

A PMI below 50 indicates weakness in China’s industrial sector, which is negative for the global copper industry and reflects a weakness in Chinese copper demand. A lower copper demand in China will negatively impact copper producers like Freeport-McMoRan (FCX), Teck Resources (TCK), Glencore Plc. (GLNCY), and Stillwater Mining (SWC). FCX currently forms 3.1% of the Materials Select Sector SPDR ETF (XLB).

So far, we have analyzed how copper demand is shaping up in China. In the next part, we will look at the supply side dynamics of the Chinese copper industry.

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