China PMI plays sharply higher again today; Hebei Steel +6% on huge volume as it breaks above its 100 day mav, WUHAN +3.2% and now back above its 200 day mav.
Remember it was Hebei that last week alerted us to the fact that Chinese steel producers are running at full capacity whilst inventories are still falling (real demand?). Further down the value chain, Fortescue +6% in Australia and Rio Tinto has made new highs for the move (stay long). In other commodities Chalco A shares +9.9%, the best performer in Asia and Yunnan Copper +6.6%. The most hated sector, Construction Equipment is also rallying, the poster children being Sany Heavy, Zoomlion Heavy and Guangxi Liugon all up over 8% (see Sany chart above).
This is how mean-reversion works.
As we’ve been highlighting Japan is a positive tail-wind for the first time in a decade and it looks increasingly likely a global capex cycle is soon to begin, coinciding with rising rates. Given recent sentiment we understand the apathy towards our positive China call so it’s interesting to note other, non-Chinese data points, the most relevant being BDIY @ 3 year highs, +4.25% overnight and now +36% since the beginning of last week. Electricity production is running at high levels and there has been no seasonal dip like earlier years (see below).
Perhaps most interesting however, especially within a context of perceived over-capacity, general apathy towards Chinese manufacturing and commodity demand, is the fact Steel producers are running at record rates (see chart above) and yet inventory is NOT rising, indicating real demand. Such is why Fearnley Consultants see an additional 200 million tons of iron ore demand likely this year.
Global PMI related sectors remain well bid as a consequence.
With this as your context we remain buyers of the Rio Tinto, ArcelorMittal, ThyssenKrupp, Holcim, Schneider, Vallourec, Voestalpine and UPM-Kymmene.
