China February producer inflation fastest in nearly nine years as commodities surge

By Sue-Lin Wong

BEIJING (Reuters) - China's producer price inflation accelerated to its fastest pace in nearly nine years in February and by more than expected as prices of steel and other raw materials extended a torrid rally, boosting profits for industrial companies worldwide.

Consumer inflation, however, cooled more than expected to its mildest pace since January 2015 as food prices fell, remaining well below the government's 3 percent target.

China's iron ore and steel prices have been rallying for a year, fueled by a construction boom, though worries are growing over rapidly rising stockpiles at Chinese ports.

The country's insatiable demand for resources has helped spur an inflationary pulse in commodities markets and the manufacturing sector worldwide.

The producer price index (PPI) jumped 7.8 percent in February from a year earlier, slightly more than economists had expected and compared with a 6.9 percent increase in January, the National Statistics Bureau (NSB) said on Thursday.

But many analysts believe China's producer inflation may peak soon, and do not expect much of a flowthrough into China's consumer inflation data, which unlike some other large economies is mainly driven by prices of food and services.

In recent months, the People's Bank of China (PBOC) has cautiously shifted to a tightening bias, inching up short-term money market rates, as authorities turn their focus to containing the risk from a rapid build-up in debt.

Cooling inflationary pressures could reduce the risk that the central bank would have to respond more forcefully.

"We expect any tightening of policy to be driven by concerns about credit risks rather than efforts to contain inflation," Julian Evans-Pritchard from Capital Economics in Singapore wrote in a note.

"Given the lack of any meaningful feed through to consumer prices, policymakers aren't likely to be too concerned about the high producer price inflation," he said.

Evans-Pritchard expects producer inflation to peak within a month or two, as year-on-year price comparisons start to moderate. Prices of many building materials such as steel reinforcing bars began to take off in spring last year.

PRICES OF STEEL, MINERALS, ENERGY REMAIN STRONG

Similar to previous months, producer price gains were mainly seen in mining and heavy industry, with a 36.1 percent leap in mining, the biggest jump in that category since early 2010.

Raw materials increased 15.5 percent, while oil refiners and chemical producers also saw solid increases.

That has been good news for some producers after years of losses which severely restricted their ability to service their debts.

Coal and chemical products firm Yunnan Yunwei said on Tuesday it had returned to profit in 2016. Its shares have gained 25 percent in the last three months.

However, while factory surveys show manufacturers have been able to pass on some of the higher input costs by raising prices of their goods, there has been scant evidence of it filtering down to consumers yet.

China's consumer inflation rate slowed to 0.8 percent in February from a year earlier as food prices fell following the long Lunar New Year celebrations. The CPI for January and February combined rose 1.7 percent.

"Although February's CPI slowdown was relatively large, CPI is still relatively steady when food and energy prices are taken out of the equation," statistician Sheng Guoqing said.

The stats bureau attributed the slowdown in consumer inflation to the Lunar New Year and cold weather.

Analysts polled by Reuters had predicted the consumer price index (CPI) would rise 1.7 percent, versus a 2.5 percent acceleration in January.

The government is targeting 3 percent consumer inflation for 2017, unchanged from last year, Premier Li Keqiang said in his annual government work report on Sunday.

China has cut its economic growth target to a more modest 6.5 percent this year to give policymakers more room to push through painful reforms to contain financial risks.

(Reporting by Sue-Lin Wong; Editing by Kim Coghill)