China Flash PMI at 51.9, Steel Demand Rises

The world's second largest economy has continued to show strong signs of recovery in the new year. As per latest reports, China HSBC's Flash manufacturing PMI reading has come at 51.9 for Jan 2013, the highest in the last two years. A reading above 50 indicates an expansion while that below 50 shows contraction in the economy. China's Flash Manufacturing Output Index came in at 52.2 for Jan 2013, reflecting an even better expansion in the manufacturing sector.

The Flash PMI has also reported that the Chinese economy is adding new jobs at a faster pace. Another good thing that is being reported is the decrease in the stocks of the finished goods which indicate that new orders are on a rise. Input prices are rising and this should be seen as a positive for the commodities since China is an export-driven economy and is the largest consumer of commodities.

In the last week (Friday, Jan 18, 2013) China reported a 7.9% growth in its fourth quarter GDP. China has seen slower GDP growth for seven straight quarters before and hence the growth in Dec 2012 quarter indicates some stability in the economy. The data published on the same day last week has also showed that the industrial output in China grew at 10.3% against an expectation of 10.1%. Exports also grew at 14%, way ahead of expectations of 4% in Dec 2012.

Along with such improvement, China has also reported a rising iron ore and steel demand. As per reports, China has reported a 7.7% rise in the steel output on a YoY basis in Dec 2012. The output also was firm on a sequential basis indicating a stable steel demand. China's steel output grew by 3.1% in 2012, against the 8.8% in 2011. The iron ore prices (up by 40% in the last four months) are already showing signs of optimism. Steel prices during the same period have increased by 13.4% and may rise going ahead. According to China Iron and Steel Association (CISA), steel prices have shown a rise in the first three weeks of January.

Will the rise in steel demand in China benefit the Indian companies? Well, the Indian companies are currently witnessing over-capacity. In the Dec 2012 quarter, production rose by 3.9% but the consumption increased only by 0.9%. The rise in international steel prices will benefit the Indian companies, what about iron ore?

The trade between India and China declined by 10.1% to USD 66.47 billion last year mainly due to the decline in the iron exports to China. Indian iron ore exports accounted for 10.6% of total iron ore imports by China in 2011. This was mainly disturbed due to the mining ban in Karnataka and Goa. India has recently shipped its first cargo of iron ore to China and many such shippings would be expected this year as the demand picks up in China.

Overall, the scenario looks cautiously optimistic for the metal sector in China after its Flash PMI numbers showed expansion.