--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Feb 25 (Reuters) - 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 themselves.
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 official PMI.
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 out.
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 the internal.
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 consumption.
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 higher.
Logic says that copper should be the metal to struggle most from softening exports from China, given its prevalence in manufactured goods.
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)