28 March 2014 09:44 [Source: ICB]
China is the number one risk in the market today. Weakness in the China PMI year to date coincides with a decline in the Chemicals Volume Proxy for Asia. Will stimulus come?
For the chemical sector, the manufacturing Purchasing Managers’ Index (PMI) is one key indicator. A reading over 50 indicates expansion in manufacturing activity – under 50 indicates contraction.
The US and the eurozone remain in expansion mode. The March flash US manufacturing PMI came in at 55.5 – down from 57.1 in February but the second highest level since January 2013. The eurozone flash PMI was 53.0 – also down from February’s 53.2.
The worrying trend has been in China. The flash HSBC China Manufacturing PMI fell to 48.1 in March – down from 48.5 in February, showing contraction for the third consecutive month.
The weakness in the China Manufacturing PMI coincides with the decline in the Asia component of the Chemicals Volume Proxy, a leading indicator developed by Paul Satchell, analyst with investment bank Canaccord Genuity. The indicator gauges volumes, and thus demand, through weekly changes in 33 spot chemical prices in the US, Europe and Asia, as assessed by ICIS.
The overall Chemicals Volume Proxy has recovered from its low of -12 in mid-February when we highlighted the warning signal in this column, but was still at -5 towards the end of Q1. Europe and the US have been hovering around the neutral mark. But Asia has shown considerable weakness since January – same as the PMI.
“The key issue remains Asia – we highlighted China weakness in mid-January, and it persists today,” said Satchell. “We would highlight benzene, butadiene and the entire polyester chain as subjects of particularly negative demand commentary currently.”
So now the prevailing hope is that China’s government will launch additional stimulus. “We expect Beijing to launch as series of policy measures to stabilise growth. Likely options include lower entry barriers for private investment, targeted spending on subways, air-cleaning and public housing, and guiding lending rates lower,” said Hongbin Qu, chief economist, China and co-head of Asian economic research at HSBC.
However, Satchell is sceptical. “Widespread belief in a ‘Xi-Li put’ (i.e. that if demand fails to accelerate naturally, it will simply elicit major stimulus) is, in our view, misguided.”
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