Moneycontrol Pro Panorama | A two-speed Chinese economy

China’s economy is growing in a lopsided way, with its manufacturing sector under pressure. (File)

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Iron ore prices have tanked to $104 a tonne from their recent high levels of $130 a tonne in March, and are now at a level last seen in November 2022. This was not how the market expected iron ore prices to behave after the Chinese economy opened up fully, and after it ended COVID-related lockdowns and restrictions on mobility in early 2023. But it’s not about iron ore or steel alone.

China’s economy is growing in a lopsided way, with its manufacturing sector under pressure after receiving an initial boost from the economy reopening. China’s April manufacturing PMI slipped to 49.2 compared to 51.9 in March, which is not only a sharp reversal but also signifies a contraction in activity. However, its services PMI reading was still healthy at 56.4, but lower than the March figure of 57.8.

Anecdotal reports indicate that consumer spending is recovering nicely, with the recent Labour day weekend seeing travel exceeding its pre-pandemic level even. One view is that the domestic economy is doing fine which is particularly reflecting on services activity, but the manufacturing sector is not doing as well. A recent Bloomberg column pointed to it being a case of two recoveries, one a struggling manufacturing one and the other a robust domestic one led by consumer spending.

One part of this could be troubles in sectors such as real estate, where troubles of major developers have seen construction activity slow down. The government and monetary authorities have been careful with their stimulus actions, perhaps to avoid lighting inflationary fires that become difficult to douse later. They may be learning from the plight of the US Fed and the European Central Bank which have hiked rates sharply to battle inflation. While many believe peak rates are around the corner, these could be accompanied by slower economic growth, which in turn affects global demand for the goods and commodities that China produces.

This situation spells rather bad tiding for commodities. Iron ore’s fall also signals weak steel prices, with Mysteel, a provider of data and research, saying China’s composite steel price is trading at levels last seen in November 2022. Weak domestic demand for steel will mean its exports will increase and along with the fall in iron ore and even coking coal prices, could lead to weak steel prices in most markets. Even in non-ferrous metals, the weakness is visible. Copper, zinc and aluminium are all down from their January levels.

While it’s a bit difficult to pinpoint what is hurting the price of crude oil all of a sudden, the overhang of a slowing world economy is a reasonable one to point to. China was expected to contribute to a significant portion of incremental oil consumption post-reopening in 2023. Then, there are chemicals that are seeing prices fall and a fall in soda ash prices had hurt Tata Chemicals’ share price.

This is bad news for India’s companies that make these commodities and intermediate goods. Falling prices are likely to squeeze sales growth and their margins, with the extent varying on their cost structure. Of course, processors may find cheaper inputs a boon, but that also depends on whether their finished products are protected from price erosion. If China’s industrial economy continues to hug the bottom and the rest of the developed world economy creaks under the weight of rising interest rates, it’s a tough period ahead for listed companies in sectors such as metals and chemicals.

However, India’s consumption economy could benefit significantly from this trend. A whole range of consumer goods—ranging from FMCG to durables such as household appliances and cars—could all become less expensive to produce. There remains the question of how to pass on the benefit of cheaper inputs to consumers because companies hate cutting prices. But that’s a much easier problem to solve when the objective is to revive growth.

The question of weak demand also remains and parts of the white-collar economy too are hurting now as layoffs mount in the tech sector. That will add to broad issues such as weak rural demand that continues to hurt consumption. Still, lower commodity prices making goods more affordable could see consumers left with more cash to spend.

The outcome is good for the government too as its capital investment plans will benefit from lower commodity prices. However, this also means that the private capex cycle may take longer to revive as lower prices and lower margins may act as a disincentive for companies to invest.

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Ravi Ananthanarayanan
Moneycontrol Pro