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China’s Manufacturing PMI numbers bad news for Australia’s resources sector

Posted on Dec 1, 2015

China’s Manufacturing PMI numbers indicate a severe decline in manufacturing.  The official PMI was 49.6 in November, indicating that the sector is contracting.  The reading was the worst in more than 3 years, and below market expectations of an already weak reading of 49.8.

Today’s reading is further negative news for the resources sector, which has suffered through a terrible year with precipitous commodity price declines.  Australia’s reliance on China as a key consumer of base metals will be further hurt by today’s PMI reading.  In spite of poor fundamentals and low expectations, miners would have been hoping that manufacturing in China would start to improve soon.  The PMI is used as a leading indicator for economic activity, and today’s number indicates that the growth in China will get worse before it gets better.

Interestingly, the non-manufacturing PMI recorded a positive number of 53.6, showing that this side of the economy is expanding.  This reading gives further support to our belief that the economy in China is under transition from the traditionally factory based towards the rising middle class consumer.  The top line economy will continue to grow strongly, however, the activity will come more from consumer spending than from industrial production.

David Lane is director of Wealth Management at Pitcher Partners