Iron ore indicators to track before investing (Part 5 of 17)
Importance of PMI
The HSBC Manufacturing PMI (or purchasing managers’ index) for China is a key indicator that shows what direction the country’s manufacturing sector is taking. Five major components make up the index:
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new orders (30%)
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inventory levels (10%)
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production (25%)
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supplier delivery times (15%)
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employment environment (20%)
HSBC bases the China Manufacturing PMI on questionnaires sent to purchasing executives at more than 420 companies in the industry each month. This is one of the most closely watched business surveys and helps financial institutions, businesses, and investors make more informed decisions.
PMI at 49.7
HSBC and Markit report that China’s manufacturing PMI was 49.7 in January compared to 49.6 in December. Numbers above 50 indicate expansion, while figures below 50 suggest contraction. A reading of 50 shows no change.
The latest data indicated a renewed expansion of Chinese manufacturing output in January, though the rate of increase was only fractional. This was the first time that production had risen in three months.
Qu Hongbin, HSBC’s chief economist for China and co-head of Asian economic research, said, “We think demand in the manufacturing sector remains weak and more aggressive monetary and fiscal easing measures will be needed to prevent another sharp slowdown in growth.”
Manufacturing and iron ore companies
Demand for iron ore closely relates to the manufacturing sector’s performance in China. A weak manufacturing index indicates a weaker business environment. This is negative for companies such as Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF).
Investing in the iShares MSCI Global Metals & Mining Producers ETF (PICK) is an efficient way to gain exposure to the iron ore sector without having to pick individual companies. BHP, RIO, and Vale form 18.9%, 11.7%, and 3.1% of PICK’s holdings, respectively. The SPDR S&P Metals & Mining ETF (XME) also invests in some of these stocks.
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