--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Feb 25 The easing in the
growth rate of HSBC's flash Purchasing Managers' Index for China
is a signal to commodity markets not to get too far ahead of
The flash PMI, the earliest indicator of China's economic
health, retreated to 50.4 in February from a two-year high of
52.3 in January.
The February reading is still comfortably above the 50-mark
that separates expansion from contraction on a monthly basis,
and it was the fourth consecutive increase for the index, which
leans more towards small- and medium-sized businesses than the
While disappointing to bulls, the pullback is by no means a
harbinger of gloomy sentiment, rather it's a reminder that
expansions are never a one-way track higher.
It's also possible that the PMI is signalling that commodity
import growth may moderate, which wouldn't necessarily be a bad
thing, given China's demand for resources has generally
surprised on the upside in recent months.
January's trade data was most likely distorted by the impact
of the Lunar New Year holiday, which fell in February this year
having been in January in 2012.
This will have resulted in a pull forward of imports into
January from February, but such was the strength of January's
data that it will take quite a weak February to even the numbers
While the PMI points to a potential easing in commodity
imports, it certainly doesn't indicate that the recovery in
China's economy has veered off track.
A breakdown of the index shows the softness in January was
concentrated in decreasing stocks of purchases and finished
goods, as well as lower new export orders.
A decline in inventories normally means buying of inputs has
to be increased in order to boost production, something that
would normally bode well for commodity demand.
The change in direction in new export orders is the worrying
factor as it shows the global economy is still far from robust,
especially in recession-wracked Europe.
More encouraging is that the index shows domestic demand is
holding up well, which fits with the authorities' aim to
gradually switch the drivers of the economy from the external to
With the domestic economy doing better in relative terms to
the export sector, this likely means that demand for crude oil
and iron ore may outperform that for copper.
Rising domestic demand tends to translate into higher
vehicle purchases and use, thereby driving gasoline and diesel
Crude imports were 5.92 million barrels per day (bpd) in
January, the third-highest on a daily basis, and volumes around
this level are likely to be the new baseline for China, given
rising demand and refinery capacity.
Iron ore imports were the third-highest on record in
January, behind December and November, and it wouldn't be a
surprise to see a pullback in volumes in February, and not only
because of the Lunar New Year holidays.
Chinese steel mills have been restocking after running down
inventories during the economic weakness around the third
quarter of last year, but they would have been discouraged by
spot iron ore prices .IO62-CNI=SI that soared to a 16-month
high of $158.90 a tonne on Feb. 20.
Prices have been above $150 for much of early January, the
time when February cargoes would have been booked.
Iron ore has also rallied about 77 percent since its
three-year low in September last year, and while the plunge to
the low was overdone, such a strong recovery should temper
demand growth, especially in the absence of supply concerns.
While there have been some port closures in Western
Australia, the main iron ore export hub, because of cyclones,
it's not expected that will disrupt supply enough to send prices
Logic says that copper should be the metal to struggle most
from softening exports from China, given its prevalence in
However, copper imports have been erratic in the past, but
the trend should be toward slower growth given the overhang in
inventories and the likelihood of rising mine supply in 2013.
Overall, the PMI suggests the Chinese economy is taking a
bit of a breather after several months of running hard.
Commodity imports should do the same, perhaps with a lag of a
month or two.
(Editing by Himani Sarkar)