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COLUMN-China PMI rebound no guarantee of higher commodity imports: Clyde Russell
04/02/2013 Email this story  |  Printable Version

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, April 2 (Reuters) - It would be logical to assume that the rise in China's official Purchasing Managers' Index to an 11-month high would signal stronger commodity demand, but this isn't guaranteed.

What the increase in the PMI to 50.9 in March from February's 50.1 does show is that the modest expansion in China's economy remains on track.

At these levels gross domestic product growth should easily achieve the government's 7.5 percent target for 2013, and is more likely to be closer to 8 percent.

This does point to rising demand for imports of major commodities such as crude oil, iron ore and coal, but only really in trend terms.

In other words, a growing economy will suck in more commodity imports over time, but trying to establish a direct link between a specific growth rate in industrial production and a specific rate in imports of various commodities is much harder.

Consider crude oil imports since the aftermath of the 2008 global recession.

Imports gained 13.9 percent year-on-year in 2009, 17.4 percent in 2010, 5.5 percent in 2011 and 7.3 percent last year.

In January 2009 the PMI stood at 45.3, well below the 50-mark that delineates expansion from contraction on a monthly basis, but it jumped to 55.6 by December of that year.

So far so good, in that there appears a link between the strong gain in the PMI in 2009 and the jump in crude imports.

But in 2010, when crude imports rose even more than they did the prior year, the PMI ambled along in positive territory and stood at 53.9 in December of that year.

In 2011, the PMI again slowed, dropped below 50 to 49 by November, which seemingly fits with the slowdown in crude import growth.

However, in 2012, the PMI struggled to stay above 50 and spent two months below, bottoming at 49.2 in August, even as crude imports accelerated.

Throw iron ore and coal imports into the mix and the picture becomes even more cloudy.

Iron ore imports jumped almost 42 percent in 2009, fell 1.5 percent in 2010, grew 11 percent in 2011 and then 8.5 percent last year.

Coal imports surged 210 percent in 2009, then by 31 percent in 2010, before easing to growth of 10.2 percent in 2011 and accelerating to 28 percent last year.

What the numbers show is that at best there is a weak link between the PMI and commodity imports, and expansion in the PMI is only a very general indicator of growth in import demand.

Does this mean we should stop watching, or caring, about the PMIs when it comes to assessing the state of commodity demand?

Definitely not, because the PMI is a good lead indicator of the trend in commodity imports, even if it isn't of as much use in predicting likely percentage changes.

When the PMI started trending downwards from April last year, it was accompanied by slowing growth in imports of crude and iron ore.

And when the PMI started a slow recovery from September onwards, imports of both key commodities also started accelerating.

But working out the extent of the likely acceleration or deceleration of commodity import growth means looking at a host of other factors.

These include seasonality, inventory levels and factors unique to each market, for example.

For instance, in the first half of last year crude imports were boosted by the filling of strategic storages, and toward the end of last year iron ore imports surged on the back of re-stocking after inventories were run down during the economic slowdown in the middle of 2012.

For now, the ongoing modest recovery in industrial output is enough to ensure that commodity demand is biased higher. (Editing by Himani Sarkar)


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