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China’s Manufacturing Slowdown Spells Trouble for Copper

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China’s manufacturing slowdown

As China accounts for ~45% of global copper consumption, it is important for investors in companies such as Freeport-McMoRan (FCX) and Southern Copper (SCCO) to track Chinese manufacturing activity. Together, Freeport and Newmont Mining (NEM) form 9.2% of the SPDR S&P Metals and Mining ETF (XME).

For investors, flash PMI (purchasing managers’ index) figures are important, as they provide early insights into China’s manufacturing sector. Markit releases the PMI numbers on a monthly basis. On September 23, the flash PMI for September was released, and the final PMI figures will be released on October 1.

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PMI still below 50

The above graph shows China’s (MCHI) manufacturing PMI. In September, China’s flash PMI came in at 47, which is a 78-month low. China’s PMI has been below 50 for seven consecutive months. Figures below 50 are generally associated with a fall in manufacturing activity.

The slowdown in China’s manufacturing sector is a negative for industrial metals. The PowerShares DB Commodity Tracking ETF (DBC) invests ~13% of its holdings in aluminum, zinc, and copper, and it has been negatively affected by the falling trend in these commodities.

Subsectors

A closer look at China’s September PMI data paints a grim picture of that country’s economy. It shows that output, new orders, and employment decreased at a faster pace as compared to the previous month. New export orders also decreased during the month. Exports are a key pillar of the Chinese economy, and any slowdown in export activity would only exacerbate China’s slowdown.

Any sustainable recovery in copper prices would depend on how the Chinese economy plays out in the coming months. In the next part, we’ll look at other key indicators of the Chinese economy.

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