(The author is a Reuters columnist. The opinions expressed are
By Clyde Russell
LAUNCESTON, Australia, Sept 3 Commodity
producers and traders have no doubt been cheered by the recent
recovery in China's key manufacturing sector, but the boost may
be more to sentiment than actual demand.
This is because there is a fairly weak correlation between
movements in China's official Purchasing Managers' Index (PMI)
and imports of key commodities such as crude oil, iron ore and
There is a far better correlation between China's imports
and the price of these commodities.
This suggests that while stronger, or weaker, industrial
growth helps set the direction for imports, the actual size of
the movement in imports is more related to price.
The official PMI rose to a 16-month high of 51.0 in August,
beating market expectations for a reading of 50.6, with the
breakdown showing better conditions across the factory sector,
including the key export orders category.
The rise in the official PMI was supported by a similarly
positive reading in the HSBC PMI survey, which rose above the
50-line that separates expansion from contraction for the first
time in four months, hitting 50.1 in August.
The HSBC index is more biased toward smaller and medium
enterprises, while the official PMI concentrates on larger,
Both PMIs appear to be saying that the Chinese economy has
turned the corner from a weaker start to 2013 and is once again
expanding on the back of increased infrastructure spending and
better global economic conditions.
It seems logical that this is good news for commodity
producers, as a stronger China generally means the world's
biggest commodity consumer imports more.
But the logic doesn't really stand the scrutiny of the data.
Take iron ore for example. From the end of the 2008 global
recession until the end of 2010 the official PMI was
consistently above the 50-mark, with the lowest reading being
51.2 in July 2010.
However, iron ore imports flatlined for much of that period
once the initial rally after the 2008 recession was over.
In fact for most of 2010 the trend in iron ore imports was
down and they only started accelerating toward the end of the
year and the start of 2011, just as the PMI was starting to
More recently, the official PMI has been meandering in a
narrow range near the 50-level, but iron ore imports have been
surging, reaching a record high in July of 73.1 million tonnes.
However, if you compare iron ore imports to the Asian spot
price .IO62-CNI=SI, it becomes clearer that Chinese buying
accelerated after last year's sharp price decline.
It also shows that the weakest month for iron ore imports
this year, namely February, came after the price had rallied
almost 80 percent between September last year and January this
PRICES, INVENTORIES MORE IMPORTANT
It's much the same story with crude oil imports, which rose
along with the PMI post the 2008 financial crisis.
However, after that oil imports were weak at the end of
2010, while the PMI was strengthening, although they both rose
in tandem toward the end of 2011.
In 2013, crude imports have been trending higher, reaching a
record in July, while the PMI has been tracking sideways.
Looking at crude imports compared to the price of Brent
and it seems that higher oil costs lead to lower imports
and vice versa.
Oil imports trended higher until September 2010 before
moving sideways for about a year, at a time when Brent prices
were elevated above $100 a barrel.
Last year, crude imports dropped around September, just as
Brent was rallying, and this year the lower oil price that
prevailed until recently has led to accelerating imports.
With copper, imports were trending higher in 2011 at a time
the PMI was trending lower. So far this year, imports of the
industrial metal have been declining while the PMI has been
Comparing copper imports to London benchmark prices
shows that imports were weaker when prices were strong between
July 2010 and July 2011, but imports rose later in 2011 as
More recently, weaker prices since April this year have
resulted in gains in imports.
What the data show is that China's commodity buying is more
leveraged to price movements than industrial output growth, as
the Chinese appear willing to use inventories and higher
domestic output when prices for imports rise.
A better indicator of likely import demand growth than the
PMI may come from watching inventory cycles, the cost of
domestic production for commodities with significant local
output, and movements in international prices
(Editing by Richard Pullin)