--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, April 1 China's official
Purchasing Managers' Index for March probably isn't as strong as
it looks, but that's likely not a bad thing for commodity demand
in the next few months.
The National Bureau of Statistics (NBS) PMI rose to 50.3 in
March from 50.2 in February, matching the consensus expectation
and indicating that the factory sector expanded slightly in the
The official measure, which focuses more on large,
state-owned enterprises, is somewhat at odds with the HSBC PMI,
which fell to an 8-month low of 48 in March, its third straight
month below the 50 level that separates expansion from
It's likely that the HSBC survey is painting a more accurate
picture of current conditions in China, given the NBS measure
tends to be seasonally strong in March, as this is the first
month after the Lunar New Year holidays, which this year
straddled January and February.
Taken together, the two PMI surveys are showing a Chinese
economy that has lost momentum and has had a soft first quarter.
So, how can this be positive for commodity demand in the
next few months?
Because the market is betting that the Chinese authorities
will return to the tried and trusted practice of stimulus
spending, which tends to fall heavily into infrastructure such
This sort of spending ramps up demand for steel, copper and
cement, and increased demand for those commodities in turn
boosts consumption of energy and transport fuels.
Premier Li Keqiang has already provided signs that stimulus
spending is coming, saying in a speech on March 28 that the
government "will launch relevant and forceful measures" to
counter a cooling economy.
Li specifically mentioned the experience of last year in
battling an economic slowdown, suggesting that this year may
follow the same template of ramping up infrastructure spending.
However, it is also likely that any stimulus will take
several months for the full impact to be felt, meaning that
economic indicators may remain soft for the second quarter,
before accelerating in the third.
DEMAND BOOST FOR COAL, IRON ORE
Stimulus spending should boost demand for iron ore and coal,
especially if global prices remain weak.
Spot Asian iron ore .IO62-CNI=SI has recovered in recent
days from its 2014 low of $104.70 a tonne on March 10 to end at
$116.80 on Monday.
But it is still almost 13 percent weaker this year, and the
prevailing market consensus is that prices will struggle to
rally significantly as additional supply comes online in top
exporter Australia and elsewhere.
Coal prices at Australia's Newcastle Port, a
benchmark for the power-plant fuel, ended last week at $74.07 a
tonne, close to the $72.98 on March 14, which was the lowest for
almost 4-1/2 years.
The low prices mean there is no obstacle from a cost
perspective should Chinese stimulus spending result in higher
In fact, weak global prices tend to result in a loss of
supply from Chinese domestic coal and iron ore miners, who have
higher costs and lower grades than competitors in Australia and
Brazil when it comes to iron ore, and Indonesia and Australia
This helps explain why Chinese imports of iron ore and coal
have remained robust even if the face of slower economic growth
and concern about overcapacity in the steel industry.
Iron ore imports in the first two months of this year were
148.07 million tonnes, up 21 percent from the same period last
year, while coal imports were just 3.5 percent weaker at 45.47
It also seems that China is starting to work its way through
record-high iron ore inventories, which were boosted by
financing deals, with stocks at 43 ports SH-TOT-IRONINV
dropping last week for the first time since the week of Dec. 13.
Anecdotal reports also suggest that many small Chinese coal
miners are having to cut output due to low prices, which should
help tighten thermal coal inventories and increase imports,
especially in the light of the low global price.
For commodity producers, the Chinese demand story appears to
be largely intact, with the current weak prices and the
potential for stimulus spending likely to keep import volumes
healthy, especially for third quarter cargoes.
(Editing by Joseph Radford)