Commenting on the China Manufacturing PMI survey, Eric Fishwick, Head of Economic Research at CLSA – Asia Pacific Markets said:
“The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession. Costs are falling but so are output prices. The coming twelve months will be difficult ones for manufacturers, China included.”
Elsewhere, Metals and Mining analyst D. Gagliano of Credit Suisse commented that:
“On 3rd November, the China PMI data for October was released, with a weak overall reading of 44.6. As a result, our China Economics team has lowered their forecasts for Chinese GDP growth in 2009 from 8.8% to 7.2%. Bottom line: For the metals & mining sector, we think the main takeaways from the macro changes October PMI data & lower GDP growth forecast are 1)Underlying metal prices will potentially stay lower for longer…i.e. potentially straight through 2009, and 2.It most likely pushes investor expectations for a sustainable rebound in the metal equities out to Q1'09, in conjunction with a trough in global IP growth rates. While we still believe the metal equities are already pricing in a worst case scenario (i.e. a marginal cost environment), the absence of a demand catalyst remains the biggest hurdle for the metals & mining group, as in our view investors will remain on the sidelines until some evidence of demand stabilization emerges. Regarding the changes we are making, we are lowering our steel price assumptions for 2009 (avg. HRC price declines from US$800/ton to US$663/ton), driven primarily by our view that weak steel demand will be met with production cuts, putting pressure on the prices of key raw material inputs for steel, which in turn will pull the marginal cost of production for steel down further. (see full report for more details & specific earnings revisions). We are maintaining our base metal & coal price assumptions. We recently cut our base metal price forecasts to what we believe to be the marginal cost of production for 1H'09, on the view we will see surpluses in each major base metal, and this data does not change that view (see 10/20/08 note for details). Similarly, in our view the U.S. thermal and metallurgical coal price assumptions (which are 30%-50% below recent transaction prices) already reflect a view that US coal exports swing back to the US in 2009. Among the individual equities - We think the first reaction to the China October PMI data will be most negative for Freeport-McMoRan Copper & Gold (FCX, $29.06, OUTPERFORM [V], TP $52.00, MW), and United States Steel Group (X, $36.88, NEUTRAL [V], TP $66.00, MW), due to a)relatively greater leverage to an underlying commodity most impacted by continued poor demand prospects from China (i.e. FCX), or b)a higher fixed cost structure than the peers (i.e. X), Conversely, we believe the following shares are positioned to hold in relatively better… Nucor (NUE, $40.51, OUTPERFORM [V], TP $50.00, MW), and Alcoa Inc. (AA, $11.50, OUTPERFORM, TP $20.00, MW), given a) more flexible cost structure (NUE), and b) underlying commodity exposure where pricing has already dropped to marginal cost (AA)."
Note: A PMI reading over 50 indicates an expansion of activity, while one below 50 suggests a contraction. Since 44.6 is clearly in the latter category I wonder if there are any 'Decoupling' theorists still remaining?
Given that China accounts for 48% of iron ore demand and 30% of copper demand, both these metals will benefit from any boosts in infrastructure spending which many are expecting the Chinese goverment to pursue in an effort to address to economic slowdown.
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