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China Factory Activity Expands, Driving Up Commodity Prices — But Can it be Sustained?

via ABC : China’s factories have continued their rebound, with activity expanding at a faster than expected pace while new orders have hit a three-year high.

The unofficial Caixin manufacturing PMI found firmer foreign demand was a key driver in spurring on new orders, with export sales accelerating at their fastest monthly pace in seven years.

The manufacturing PMI rose by 0.5 points to 51.6 in August, the second highest reading of activity this year and the third consecutive month it has expanded after a period of softness earlier in the year.

A reading of 50 reflects the breakeven measure between expanding and contracting activity.

The Caixin survey focuses more on small-to-medium enterprises than the official state-owned enterprise heavy PMI and is considered more reliable.

The official National Bureau of Statistics PMI released yesterday also showed factory activity expanding, although it noted that the services sector was growing at its slowest pace since May 2016.

The stronger demand for exports saw companies expanding their production schedules and buying activity, while business confidence rose to its highest level for five months.

Caixin noted stricter environmental policies were a key factor leading to longer delivery times, whilst inflationary pressures intensified as input costs and output charges both rose at faster rates.

“Overall operating conditions of the manufacturing sector improved further as market demand strengthens, but if prices rise too quickly the profitability of companies in the middle of a supply chain may be under pressure,” Caixin’s chief economist Zhengsheng Zong said.

Commodity prices surging

The stronger pulse in China’s industrial heartland has flowed through to commodity prices.

Iron ore futures on the Dalian exchange rose another 4 per cent in trade this morning, while the spot price was up almost 4 per cent to $US78.91 yesterday.

The top-grade 65 per cent pure ore is now trading close to $US100 a tonne according to industry newsletter Metal Bulletin.

As well, copper is now at three-year highs having put on 7 per cent last month, while aluminium, nickel and zinc prices have been rising at their fastest monthly pace in five years.

Capital Economics Julian Evans-Pritchard said while industrial activity appeared strong for now, momentum elsewhere in the economy had weakened.

“We suspect that it is speculation over future capacity cuts that has pushed up metal prices and industrial production, rather than stronger underlying demand,” Mr Evans-Pritchard said.

“Indeed, investment growth has cooled recently and we anticipate a further slowdown as the impact of tighter monetary conditions continue to feed through.

“If we are right, then the current strength of industrial activity can’t be sustained for long.”

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