COLUMN-Commodity markets sceptical of China PMI boost – by Clyde Russell (Reuters India – September 24, 2013)

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Clyde Russell is a Reuters market analyst. The views expressed are his own.

LAUNCESTON, Australia, Sept 24 (Reuters) – What does China’s factory sector growing at its strongest pace in six months have in common with the U.S. Federal Reserve’s decision to keep buying bonds? Both failed to boost commodity prices much.

The flash HSBC Purchasing Managers’ Index (PMI) rose to 51.2 in September from August’s 50.1, the highest level since March and strengthening the view that economic growth in the world’s largest commodity consumer is regaining momentum.

The PMI improvement came days after the Fed surprised market watchers by keeping its bond purchases at $85 billion a month, judging that it is still too early to taper monetary stimulus, given the nascent economic recovery in the United States.

Both developments should be positives for commodity prices, as both point to the likelihood of stronger growth in the next few months in the world’s two largest economies.

While the Fed decision did give a small boost to some commodity prices, it didn’t last, with London benchmark copper CMCU3 having given up more than half of the 2.1 percent rally on Sept. 19, the day after the Fed announcement.

Brent crude oil LCOc1 failed to maintain its Fed-inspired gains, and is now below the pre-announcement level, trading at around $107.91 a barrel in Asian trade on Tuesday.

Asian spot iron ore .IO62-CNI=SI is marginally higher than before the Fed decision to delay tapering its quantitative easing, having risen 10 cents to $131.80 a tonne the day after the announcement, and adding another 60 cents to $132.40 after Monday’s flash China PMI.

It is perhaps easier to find reasons why the Fed decision didn’t move commodity prices much, given that while the move was unexpected, the market has taken the view that tapering is still likely before the end of the year.

The scaling back of bond purchases by the Fed may be a double-whammy for commodity prices, since it is likely to boost the U.S. dollar as well as take some wind out of the U.S. economy’s sails.

But the China PMI should be good news for commodity demand and prices, as rising factory production boosts demand for industrial metals and for oil products.

There may be several factors limiting the impact on commodity markets from China’s improving economic numbers.

The first is the relatively weak link between PMI outcomes and actual import volumes.

Looking at iron ore, for most of 2010 imports trended down, and they only started accelerating toward the end of the year and the start of 2011, just as the PMI was starting to weaken.

More recently, the official PMI has been meandering in a narrow range near the 50-level, but iron ore imports have been surging, reaching a record high in July of 73.1 million tonnes.

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