Global manufacturing decline weighs on minerals demand

By IM Staff
Published: Friday, 30 August 2019

Data shows a continued slide in worldwide factory output, with raw materials traders reporting weaker orders from buyers.

Global manufacturing output slipped for a second month in July 2019, depressing demand for industrial minerals, according to a combination of purchasing managers’ index (PMI) survey data and market feedback.

The JP Morgan Global Manufacturing PMI for global manufacturing production registered 49.3 during the month, down from 49.4 in June, marking two consecutive months of readings below the 50 mark, which indicates flat performance.

"Production and new order intakes declined further, because conditions in many domestic markets remained soft and international trade volumes continued to contract," the JP Morgan PMI commentary said.

China’s official manufacturing PMI for July, published by its National Bureau of Statistics, came in at 49.7.

Weaker demand in China contributed to a fall in factory producer prices for the first time in three years in July, with Chinese manufacturers feeling the strain of the intensifying trade war with the United States. Overall exports from the country increased by 3.3% year-on-year in July in dollar terms, however, recovering from a 1.3% drop in June.

China’s factory gate prices, which represent a range of manufactured products, raw materials and mining output, fell by 0.3% in July, the statistics show, the first drop since August 2016.

Minerals traders said that they had noticed a slowdown in July which was consistent with seasonal trading norms, but which they fear may persist for longer than usual.

UK 'not bothering’ to stockpile for Brexit

The drop in UK manufacturers’ output was the steepest in seven years in July, with growth being choked by worries over Brexit - the UK’s planned exit from the EU - and weaker global demand.

July’s PMI data showed that output from UK factories declined to 47.0, its lowest level since 2012. Manufacturers’ stock levels were fairly stable during the month, because some businesses continued to run down inventories that were built up during a stockpiling frenzy ahead of the original Brexit deadline of March 29, 2019.

The PMI data suggested that some have started to build up again in preparation for the new Brexit deadline of October 31, but so far this has not translated into a noticeable increase in demand for key raw materials, such as industrial minerals and metals.

"Concerning our British customers, we have not seen major turbulence yet," one supplier of refractory minerals and speciality carbon products to UK industrial customers said. "I would have expected to see a situation similar to that seen early this year, when exporters were called on to put lots of stock into the UK before Brexit, because no one knows what will happen afterward."

Industrial minerals traders said that they did not raise prices for UK customers amid the first quarter’s panic-buying, other than to cover additional expenses incurred in sourcing larger-than-usual volumes at short notice.

They added that some buyers still have stock left over from this period and were reluctant, or unable, to embark on another buying spree.

Businesses reported that the weaker sterling - which hit a two-year low against the dollar in early August, when GDP data showed a 0.2% contraction in the UK economy in the second quarter of 2019 - was pushing up the cost of some imports.

But overall, UK PMI data showed that raw material costs in July rose at their slowest rate for three years, and so did the prices at which manufacturers sold their goods.

"The latest GDP data show that firms across the economy added to the stocks of goods rapidly in [the first quarter], but then depleted most of the stocks they had accumulated in [the second quarter]," Samuel Tombs, chief UK economist at research consultancy Pantheon Macroeconomics, said.

"Ahead of the next Brexit deadline, stockpiling will probably increase again, especially since markets see a much greater chance of a no-deal Brexit - about 40% - than they did in the run-up to the March deadline," he added.

Uncertainty continues

The JP Morgan PMI reported that the manufacturing outlook became less positive in July, with surveyed companies expressing concern about trade tensions, Brexit, geopolitical instability and currency movements.

Industrial mineral exporters to the UK said that they could not predict demand levels over the coming months, because sudden policy moves on Brexit could trigger a mass change in importers’ behavior, while the continuing uncertainty will leave businesses to make individual decisions on stock levels.

Almost half of the businesses surveyed (46%) for the July PMI said that they expected order figures to rebound after Brexit, whatever the outcome of the UK’s deal negotiations with the EU.

On August 1, new UK Prime Minister Boris Johnson announced plans to create as many as 10 freeports to avoid the likely increase in costs and bureaucracy associated with physical goods trading if the UK does indeed leave the EU single market.

As they are operated elsewhere in the world, freeports are free trade zones where imported goods and raw materials can be held, processed or used to manufacture products free of customs duties before being exported.

The plans have received a mixed reception from UK businesses, due to fears that the suggestion has been rushed out without being tested and was not designed for the UK economy.