Could China’s weak PMI figures be good news for commodities?

For the past three months, China’s Purchasing Managers’ Index has been below 50, a sign that the second-largest economy in the world is getting more and more pessimistic. The sub-index for the important construction industry dropped significantly from a high of 65.6 in March to 51.2 in July.

Beijing’s most recent economic stimulus efforts have been vague, so it is unclear what measures will be implemented or how successful they will be in reviving the economy. Copper investors are ready to support Beijing, as seen by the main Shanghai futures contract reaching a 15-month high.

Domestic investors are also bullish on copper, with benchmark London contracts ending at $8,831.50 a metric ton. Iron imports of key steel raw material are strong in July, with an estimated 101.39 million metric tons and 100.96 million, making it the strongest month for raw iron imports since January’s 103.6 million metric tons.

Further support for raw iron imports is likely coming from declining port inventories, with stockpiles dropping to 121.8 million metric tons in the week to July 28. The need to rebuild stockpiles and expectations of more policy support for the construction and manufacturing sectors is likely to support both raw iron import volumes and prices. However, the risk is that the reality of Beijing delivers doesn’t match the current optimism being baked into prices.