Capesize

13750

May-17
450.00 3.38%

Panamax

8300

May-17
-200.00 -2.35%

Iron Ore

61.5

May-17
-0.50 -0.81%

Sing 380

292.65

Jun-17

Coking Coal

177

May-17
1.00 0.57%

Nola Urea

172

May-17
3.00 1.78%

FIS Market Review: Churning the Chinese Engine


China’s economic slowdown seemed to a day of the past with strong showing from its latest Purchasing Manufacturing Index (PMI). The IHS Markit Caixin PMI for July indicated a four-month high rating at 51.1 in July, far surpassing market expectation as well as scoring higher than June’s PMI reading of 50.4.

The compilation of IHS Markit Caixin PMI differed from China’s official PMI in focusing on small and medium-sized private firms instead of the on larger state-owned enterprises in the manufacturing sector.

In contrast, China’s official PMI has dropped to 51.4 in July, lower than June rating of 51.7. Thus, may we see more market rallies being led by Chinese private sectors?

 

Higher PMI despite falling staff level. According to IHS Markit, the increase in July’s Caixin PMI was due to higher output, new orders and sales which rose at faster rates for five months, thanks to uptick in export sales.

The higher PMI has helped to offset the weakness in staffing levels which had fell at the fastest pace in 10 months across employment levels at factories. The primary causes came from higher input and output charges which prompted the firms to adopt a cautious stance in hiring.

As such, the growth in private manufacturing sector was deemed as short-term in nature, supported by the robust commodities market. With coming stricter financial leverage imposed by the Chinese authority, the funding for commodities trade may run dry and dragged down the manufacturing sector as a whole.

 

China’s service PMI falls in July.  In the meantime, China’s official service PMI has also dropped to 54.5 in July from a high 54.9 rating in June 2017. However, the July’s reading was still higher than the average for the first half of the year and consumer spending related to the summer season such as rail and air travel, accommodation, food and beverage still remained high compared to monthly average standard.

The drop has followed the decline with China’s official PMI which were attributed to bad weather and flooding that slowed manufacturing activity in July 2017. Despite the slowdown, the manufacturing sector was still on expansion mode in July 2017, as any rating above 50 states that the economic activities are growing and any reading under 50 shows that the economy is contracting.

 

Chinese futures saw best daily performance in 10 months. Chinese iron futures recorded 8% on Monday, 31 July 2017, well hitting the trade limit with its best daily performance since November 2016.

The physical market has also followed the uptick with spot iron ore prices for the benchmark 62% achieved at USD73.70/mt on Monday, the highest level since 11 April 2017, and rallied 38.1% from 13 June 2017, according to the Metal Bulletin.

The rally came from Chinese premier Li Keqiang’s speech over the weekend in pledging the Chinese authorities’ determination in removing steel redundancies and halting the output of substandard steel among China-based mills.

So far, China is well ahead of its schedule and managed to cut around 120 million of low grade steel capacity and 42.39 million tonnes of crude steel capacity or reached 84% of its annual target for 2017. With steel capacity reduction gaining paces, some end-users anticipated higher steel prices in future and went bullish in procuring raw materials.

In the meantime, the extra firepower for the iron ore rally came from China’s official sub-index for construction activity growth which grew to 62.5 in July, the highest rating since December 2013.

 

Mills’ margins keep high above RMB 1,000/mt. China-based mills earned the margin of around RMB 1,000-1,200 for every mt of crude steel produced. Due to healthy margins, the mills are not bother by the higher prices raw materials that ranged around at USD70/mt mark as the costs of them are nothing compared to the average profits of RMB 1,000 from steel making.

However, some buyers think that the prices are unsustainable at the moment and believed that the market was overreacting toward the Chinese authority’s pledge in steel capacity reduction. Thus, some mills choose to wait for downward prices correction before procurement.

 

China’s import of coking coal stabilizes in June. China’s coking coal imports for June was stable at 5.79 million mt, similar to previous June import volume last year. The latest monthly import has also indicated a recovery from a drop of import volume in May at 4.65 million mt, based on the findings of the country’s customs data.

Among the June import, Mongolian cargoes accounted nearly 45% of the imports at 2.6 million mt, then Australia made out of another 38% at 2.2 million mt. These volumes then were followed by imports from Russia at 369,000 mt, then US at 286,000 mt and finally Canada at 251,000 mt.

Apparently, Mongolia has become China’s top coking coal importer in June 2017, supplanting Australia which was the top importing destination for China back in 2016. The recent cyclone supply disruption in Australia may be the reason of the switch as China looks to diversify its importing sources to prevent over-reliance on Australian cargoes.

 

Chinese importers throw off by high coking coal prices. Chinese coking buyers are hesitant to procure as price hit above USD180s/mt FOB Australia levels for premium coals. Price level at such levels will eat into mills’ steel margins and many Chinese mills are adopting a wait and see attitude to see if the prices will drop in near term.

In the meantime, Chinese domestic coking coal prices may head toward a price hike due to tighter supply ahead. A Shanxi premium coal producer stated that they were planning to raise their coal prices, by RMB 30/mt to RMB 1,260/mt ex-washplant, including six months’ credit and 17% VAT.

The tighter domestic supply was caused by heavy rains that poured down in different parts of Shanxi recently which made safety inspections harder. Thus, miners had to adopt a more cautious approach in mining operation to minimize risks posed by the heavy rains.

 

Conclusion

China has more on its sleeves to keep the economic engines running forward. In fact, the country had already achieved 6.9% growth in the first six month of 2017, and well scheduled for its targeted growth of 6.5% by year-end. The strong growth may be part of the infrastructure stimulus programme launched by the Chinese authority to keep its economy ahead of the 19th Party Congress. In the meantime, the drawback for this enormous economic machine may lie in the ongoing crackdown on financial leverage, till then sooner or later, only time will tell if the machine takes a breather.

 

 

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