China’s steel PMI crashes

China’s non manufacturing PMI is out today. Before we get to the headline index let’s look at the steel sector sub-component:

A couple of points. Clearly output consolidation has begun. New orders look bleak but exports are slowing a little less rapidly. Inventories of goods and inputs (ore and coal) are both running down sharply.

So, the inventory cycle is well under way but there is no sign yet of a rebound in demand so it could still run for a while.

If demand arrives, the rebound in prices will be powerful. If not, it won’t.

On to the headline index, which rose 1.3 points in August:

All of the bounce seems to have come from input and output prices.

David Llewellyn-Smith
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      • That’s the only thing that can bring them back at this point, right? Chinese steel capacity is enormous; it looks to me as though the expansion was in response to trends in fxied asset investment that were totally unsustainable over any period longer than about 5 years. But what scares me in that steel output is still extraordinarily high. I understand that the recent collapse in iron ore prices has been due in part to a buyer’s strike and a run down of inventories, but the decline can only be reversed if you presume restocking of raw material inventories while steel output remains high. So yeah, I guess everything is riding on a a repeat 2009 stimulus. Best of luck, boys.

    • I’ve never cheered the dollar higher – that is your personal continual misrepresentation.

      I simply point out that a high dollar has benefits and drawbacks; as does a low dollar.

      • Funny. I’m yet to see you point out a drawback of a strong dollar … but I expect this will all change soon when your paymasters issue new instructions.

        Its one thing to support a strong dollar when you’re getting $180/t for ore, but its quite another when you’re only getting $80/t. I can’t wait for the miners to start screaming for currency intervention.

  1. Question for the boffins here:

    The Pascometer keeps banging on about how a Chinese PMI a bit below 50 means industrial production is growing by 8 or 9 per cent.

    Is that right?

    • Yes, it’s right. IP is much broader than the PMI, which covers manufacturing only.

      But it’s also completely stupid. Nobody ever claimed otherwise. Nobody who worries about the PMI is claiming IP is falling.

      It’s a straw man to divert attention from an indicator that is weakening.

      We report IP every month too (the growth rate of which has been falling) but when we do we don’t jump up and down about the PMI contracting. Or for that matter, point to the growth in some other indicator.

      The sum total of the Chinese economy is still growing at 7% and how is that helping commodity prices and Australia’s economy?

      This glass half full stuff is tripe. It’s beneath Glenn Stevens and is just noise for the echo chamber commentator.

      If it’s a thought crime to consider the meaning of a negative indicator, it’s no wonder every hiccup we get in the business cycle is a surprise to the consensus.

          • Fair enough. I always assumed the manufacturing PMI meant just that manufacturing. I never assumed it meant the Chinese economy was contracting, because FAI forms such a huge part of the Chinese economy.

            Dunno why the Pascometer feels the need to bang on about this. Seems like he’s getting very defensive of the China-will-grow-at-10%-forever view.

        • Manufacturing is one element of growth, albeit in China an important one. As the article below suggests FAI likely to remain an important part of growth for some time.

        • Grenville’s piece is weak. I agree that China possesses great growth potential via productivity. But he doesn’t mention debt at all, which is the key component of why Pettis sees the 50% investment ratio as unsustainable.

          He is also completely wrong when he says if Pettis is right then the world will fall apart. The whole point of the Pettis thesis is that the growth model must shift from creating value destroying growth for its own sake to growth aimed at increasing household incomes. Ending financial repression.

          In that event, Pettis argues that China can consume for the ages, which will be fantastic for the major global imbalance that exists between China and the US. It will just suck for Australia as everyone else heals.

          As for the attempt to corner Pettis on the bet with The Economist, that is beneath the entire debate.

          AS in the case of every other member of Australia’s elite, Grenville is unable to conceive of successful Chinese growth that isn’t dependent upon Australian resources.

          It’s as if these guys are card carrying members of the CCP.

          • Kinda with you on the flimsiness of Grenville’s piece, just. There is good argument that continued FAI is absolutely key for continued growth and continuation of gradual ‘rebalancing’.

            The future is exactly that, but long term I think it swings in our favor. At least in terms of resources

          • Yes I’m not sure which left me more convinced of the strength of Pettis’ argument; his piece or Grenville’s.