China data is ‘grim reading’ for commodities demand, economist says

The China Caixin manufacturing purchasing managers index (PMI) fell to 49.2 in July from 50.5 in June, according to data released Tuesday by Caixin Media Co. and S&P Global. That marked the first reading below the 50 level, which separates expansion from contraction, in three months.

China’s official manufacturing purchasing managers index, meanwhile, rose to 49.3 in July from 49.0 in June, the National Bureau of Statistics said Monday.

The average of the two measures fell for a fourth straight month, Tompkins noted, consistent with a broad slowdown in factory activity after an initial boost following the lifting of COVID restrictions. The PMI readings now suggest activity in the manufacturing sector is contracting.

The slow recovery of China’s economy last year after the pandemic has been blamed for weakness in commodity prices, particularly oil, over the first half of 2023. China’s government has since pledged to shore up economic activity, but has yet to unveil large-scale stimulus measures. Nevertheless, markets have reacted positively. Chinese stocks rallied in July, with the Hang Seng Index
HSI,
-1.97%
rallying more than 6%, while both Brent
BRN00,
+1.01%
and West Texas Intermediate
CL00,
+1.07%
have bounced to three-month highs.

Front-month copper futures
HGU23,
-0.14%
jumped 6.8% in July, ending Monday at the highest since April 20. Industrial metals were boosted after China’s top economic planning agency released a wide-ranging policy document targeting the removal of consumption restrictions and improvement of infrastructure and other events, noted Daria Efanova, head of research at Sucden Financial, in a note.

“While this stimulus is aimed at consumers, it is unlikely to stimulate consumption in the near term. Weak consumer confidence remains a key driver in slower demand, and while supply conditions should improve, we do not expect this to drive base metals prices higher in a sustainable way,” Efanova wrote.

Metals prices pulled back Tuesday, while Chinese and European equities declined on concerns about activity. U.S. stocks were putting in a mixed performance,with the Dow Jones Industrial Average
DJIA,
+0.20%
edging up 0.1%, while the S&P 500
SPX,
-0.27%
was off 0.3%.

Looking at Tuesday’s data, Tompkins noted the new export orders balance in the Caixin manufacturing PMI fell from 50.1 into contraction territory at 46.1 in July, likely weighing on industrial metals based on the past relationship between prices and export activity (see chart below).

While exports to key markets, including the U.S., has been more resilient than first feared, a “marked slowdown” remains likely later in the year, Tompkins said.

Declines in PMI readings for services and construction may be even more worrisome, the economist said, showing activity in other sectors of China’s economy are also slowing down.

“Overall, China’s PMIs appear grim reading for the health of commodities demand. However, industrial metals prices have mounted a recovery over the last month owing to expectations of Chinese fiscal stimulus,” Tompkins said, expressing optimism that measures will manage to put a floor under activity in the construction sector.