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China’s Flash Manufacturing PMI Still in Contractionary Zone

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China’s Flash PMI

Reported on a monthly basis by Markit, China’s flash PMI was released on June 23. The final PMI figures will be released on July 1. Flash PMI figures provide early insight into China’s manufacturing sector.

The following chart shows China’s manufacturing PMI. In June, the Flash PMI came in at 49.6—a three-month high. However, the PMI has now been below 50 for four consecutive months. A reading of 50 separates contraction from expansion, and a figure below 50 is associated with contracting manufacturing activity.

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According to Annabel Fiddes, an economist at Markit, “On one hand, the sector shows signs of improvement as output stabilized amid a slight pick up in total new work, while purchasing activity also rose slightly over the month. On the other hand, manufacturers continued to cut their staff numbers, with the latest reduction the sharpest in over six years.”

Manufacturing and iron ore companies

Iron ore demand closely relates to the manufacturing sector’s performance in China. A slowing pace of manufacturing does not bode well for already-depressed iron ore prices. This is negative for companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale (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 choose individual companies. BHP Billiton, Rio Tinto, and Vale form 17.9%, 10.8%, and 2.6% of PICK’s holdings, respectively. The SPDR S&P Metals & Mining ETF (XME) also invests in some of these stocks.

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