Recently, China posted economic data that shows a further decrease in its industrial/manufacturing activity. This short article just provides some latest figures and a little thought about the future of oil prices - which can of course change its direction after the 4th June meeting.
Factory activity in China slumped to its lowest levels since its reopening, latest data showed. China’s official manufacturing PMI came out at 48.8 which is down from April’s 49.2 hinting further contraction in economic activity. The non-official manufacturing PMI also decreased to 54.5 in May from 56.4 in April - lowest in 4 months.
Recessionary risks in other parts of the world are also not helpful as exports to U.S. grew only by 8.5 percent in April vs 14.8 percent in March.
The release of China's manufacturing and services data also had a negative impact on the stock markets. In Hong Kong, the Hang Seng Index plummeted by 2.4% during the afternoon session, hitting a six-month low. Currently, the index is down more than 20% from its peak on January 27. Similarly, Japan's Nikkei 225 (N225) experienced a decline of 1.4%. China's Shanghai Composite Index also saw a decrease of 0.6%. South Korea's Kospi initially showed signs of improvement but ended up sliding down by 0.3%. Reflecting investor sentiment, the Chinese yuan weakened against the US dollar, with the offshore yuan trading at 7.126 per dollar, down 0.5%, and the onshore rate dropping 0.4% against the greenback.
Oil Markets
How will this impact the oil markets? Clyde Russel of Reuters once again provides some excellent perspective.
As highlighted by Russell this weakness in second largest economy and one of the largest consumer of oil might only reflect in the oil markets after a certain lag - in the coming months as the orders placed (or not placed) will reflect in the import data once the shippments arrive which usually takes weeks.
Another important point raised in the article above was that the slowdown in economic activity isn’t only confined to manufacturing but can also be seen in other sectors such as: Property investment in April fell by 16.2% compared to the previous year, marking the fastest decline since November 2022. Property sales, measured by floor area, dropped by 11.8% year-on-year in April, the largest decline so far this year. Additionally, industrial profits saw a significant fall of 20.6% in the first four months of this year compared to the same period in 2022.
Regarding China’s import of metals such as iron ore and cooper, it is construction and manufacturing that primarily drive demand as they account for a substantial portion of China's steel consumption. As the construction and manufacturing sectors weaken, it is expected to impact commodity imports in the coming months, although current imports are projected to remain strong due to the nature of lagging indicators. For example, seaborne iron ore imports are expected to reach around 93.29 million tonnes in May, surpassing April's 90.44 million tonnes.
Crude oil imports are also anticipated to rise to 11.22 million barrels per day (bpd), up from April's 10.36 million bpd but lower than the peak of 12.37 million bpd in March. Similarly, coal imports are forecasted to increase slightly to 34.33 million tonnes in May from April's 33.61 million tonnes. But it is important to note that these indicators are lagging not leading and if the trend of disappointing economic data continues, Chinese buyers may consider reducing imports in the future.
The first week of June is going to be very interesting. Oil prices are slightly up as the issue of debt ceiling seems to be coming to a solution - which was always expected.
Also, the following news item was very interesting … and odd!
More on this later on!
Before saying goodbye, here is a very interesting article that you should read. It is important to read literature, philosophy and something soft, serene, and smooth which puts us in touch with our human side. Otherwise too much attention to the sharp edges of numbers, ticker symbols, and data can render us robotic - let’s leave it for the real ones!
Happy Reading!
The eloquence with which you discuss the economic data, the market reactions, and the implications for oil prices is truly praiseworthy, a rare talent for making complex economic matters both accessible and captivating.
Osama, Outstanding article and update. Thank you.