(The opinions expressed here are those of the author, a columnist for Reuters.)
* GRAPHIC: China PMI vs iron ore, coal prices: tmsnrt.rs/2SxeDuQ
By Clyde Russell
LAUNCESTON, Australia, Jan 3 (Reuters) - The slump in China’s Purchasing Managers’ Index (PMI) is likely to prove an unwelcome New Year’s gift to the world’s major exporters of bulk commodities such as iron ore and coal.
The manufacturing gauge compiled by Beijing’s National Bureau of Statistics dropped to 49.4 in December, dropping below the 50-level that demarcates growth from contraction, for the first time since July 2016.
The outcome was also below the 49.9 median forecast in a survey of analysts, and the weakest reading since in almost three years.
The problem for iron ore and coal producers shipping to the world’s biggest commodity importer is that the PMI has a strong correlation to prices, once a lag of a month or two is factored in.
The Chinese PMI showed a solid uptrend from July 2016 to a peak of 52.4 in September 2017, a period that coincided with gains for the prices of iron ore and thermal coal.
Iron ore with a 62-percent iron content for delivery to China MT-IO-QIN62=ARG, as assessed by Argus Media, almost doubled in price from June 2016 to a peak of $94.75 a tonne in February 2017.
Thermal coal at Australia’s Newcastle port, as assessed by Argus Media, also enjoyed a strong run from June 2016 to November of that year, more than doubling to reach a peak of $110.73 a tonne.
Both coal and iron ore reverted to the usual seasonal pattern of peaks in the northern hemisphere winter and troughs in the summer, but prices remained above the 2016 lows.
A slowing in the Chinese PMI to 50.3 in February 2018 was matched by lower iron ore and coal prices by March. But a recovery in the PMI to 51.9 by May saw iron ore prices stabilise and coal prices regain strength.
The issue for iron ore and coal exporters such as Australia, Brazil, Indonesia and South Africa is that the Chinese PMI is now in an established downtrend, having peaked in May last year and fallen every month since, apart from a slight bump in August.
Iron ore and coal have both managed to hold up relatively well in that period, especially considering the rout in other commodities such as crude oil.
Newcastle coal did retreat from its seven-year high of $119.74 a tonne, reached in July last year, but it only fell as far as $97.50 in late November, and has since then actually managed to move higher, to $99.74 in the week ended Dec. 28.
Iron ore, in contrast to the PMI, climbed for most of the second half of 2018, reaching as high as $77.80 a tonne in early November, before dropping to $64.55 by the end of the month.
However, since then, similar to coal, iron ore has managed to stage a little rally, closing at $72.40 a tonne on Wednesday.
There are short-term drivers of the iron ore and coal price that can outweigh a longer-term correlation with the PMI. These include winter peak demand for coal, and restocking by steel mills ahead of the lifting of China’s winter pollution controls.
But it also appears that for iron ore and coal much of the recent resilience in prices is built on the hope that Beijing will open the stimulus taps and boost steel- and energy-intensive industries, such as infrastructure and construction.
The optimistic view in the market is that the authorities will do what is necessary to ensure that economic growth remains above 6 percent in China - a level that seems to be taking on some sort of iconic status as a line in the sand that Beijing will defend, even at the risk of creating more credit problems from unrestrained spending.
It may yet be the case that China does successfully stimulate its economy, or it may get a boost if its trade dispute with the United States is resolved in the coming months.
But unless there is some evidence to back up the optimistic scenario, iron ore and coal prices would seem increasingly likely to weaken, in line with the PMI.
Editing by Kenneth Maxwell