Key indicators you should watch out for in the iron ore industry (Part 7 of 11)
Why is PMI important?
China’s purchasing managers’ index (or PMI) is an important indicator that shows you the direction of Chinese manufacturing. Manufacturing PMI is a composite index based on five major components:
- New orders (30%)
- Inventory levels (10%)
- Production (25%)
- Supplier delivery times (15%)
- The employment environment (20%)
HSBC China’s PMI is based on monthly replies to questionnaires sent to purchasing executives in over 420 manufacturing companies.
It’s one of the most closely watched business surveys. It helps financial institutions, businesses, and investors to make more informed decisions based on economic trends.
Manufacturing PMI hits an 18-month high
HSBC/Markit reported its manufacturing PMI at an 18-month high in July at 51.7. This is higher than June’s final reading of 51.0. Numbers above 50 indicate expansion, while figures below 50 indicate contraction, and a reading of 50 indicates no change.
This is the second consecutive monthly improvement in operating environment for Chinese manufacturers. Stronger exports and government stimulus are major factors that led to this result.
The new orders index rose to 53.3—its best reading since March 2013. Output also rose to its strongest rate since March 2013.
Impact on companies
Demand for iron ore closely ties to manufacturing sector performance in China. A favorable shift in the PMI indicates improving demand prospects, which should positively benefit companies like Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF).
The SPDR S&P Metals & Mining ETF (XME) is another way of getting exposure to this sector.
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