US, China manufacturing PMIs: A tale of two markets

The March manufacturing purchasing managers' indexes (PMIs) for China and the US were released today, painting a picture of life before and after the coronavirus crisis peaks.

In China, the headline Caixin manufacturing PMI rebounded to 50.1 in March from a record low of 40.3 in February at the height of the outbreak in the country. That outbreak has spread from China to the rest of the world, and the manufacturing PMI for the US — now the country with the most coronavirus cases — declined to 48.5 in March from 50.7 in February. April's figure is expected to be worse. Any score below 50 indicates contraction while a score above 50 indicates expansion of purchasing activity.

The US' coronavirus outbreak is only now gathering pace, with 32 of 50 states having ordered citizens to remain indoors and business to close. Factory output in the country has this month fallen at its quickest rate since the 2009 financial crisis, while employment in the sector fell at its quickest pace in 10 years.

"Worse is likely to come as consumer spending falls further in the coming months as lockdowns intensify and unemployment spikes," data firm IHS Markit's chief business economist, Chris Williamson, said.

The lockdown measures have hit the US automotive sector hard. Vehicle sales will be down by around 40pc on the year in March, US carmaker body the Alliance for Automotive Innovation (AAI) estimates. And over 92pc of the US' 176,070 automotive workforce are either working from home or not at all, AAI said. As of 26 March, 41 of the US' 44 large assembly plants were closed. The car market is one of the largest for steel, aluminium and the alloying elements used to strengthen those metals.

The US' crude steel production was down by 9.8pc on the week and by 12.7pc on the year in the week ending 28 March, according to the American Iron and Steel Institute (AISI).

China on the road to recovery

China seems to be over the worst effects of the outbreak, having reported only a handful of new cases in the past few days. There is a risk that the virus could be imported back from the rest of the world, but even the epicentre Hubei province is starting to open up again.

Prices of metals fully reliant on Chinese supply, such as manganese and magnesium, rose sharply in February but have fallen just as sharply in March as smelters, traders and ports reopened after an extended lockdown. Cobalt prices in China have fallen as Chinese refineries try to raise cash quickly to make up for February's lost business. And this is a sign of things to come. Many metals producers, traders and consumers will be starved of cash.

The effects of the virus on other parts of the world have impacted China and demand for its products. Most metals exporters in China are struggling to find willing buyers overseas. Lockdowns abroad have also cut of vital metals supply routes. A 21-day lockdown in South Africa has cut off supply of cobalt hydroxide, and ports in the country cannot ship manganese or chrome ore. Around 80pc of China's chrome ore came from South Africa last year.

"The manufacturing sector was under double pressure in March," Chinese independent investment research group CEBM's chairman and chief economist, Zhengsheng Zhong, said. "Business resumption was insufficient, and worsening external demand and soft domestic consumer demand restricted production from expanding further. Whereas, business confidence was still high and the job market basically returned to the pre-epidemic level, laying a positive foundation for the economy's rapid recovery after the epidemic."

Storm brewing for global trade

The coronavirus crisis has highlighted two key problems for the metals industry, one of which is the developed world's over-reliance on China for raw materials and semi-finished products.

European metal prices have been extremely volatile since January, rallying on a lack of supply in China and then plummeting when Chinese sellers returned to the market aggressively targeting overseas markets.

It remains to be seen how countries try to mitigate these supply shocks. The AISI has already called on the US government to maintain steel tariffs. And the European Steel Association (Eurofer) has asked the European Commission to introduce stricter tariffs on Chinese steel.

The second key problem for the industry is the political fallout as Washington appears to assign blame for the crisis to China, escalating tensions between the two. If other countries follow suit, it could mean a review of Chinese involvement in supply chains across metals-consuming industries.

The UK's decision to involve Chinese technology firm Huawei in its 5G rollout could be reversed. And other parts of the technology industry could be affected, with demand for electronics metals in Europe increasing as a result.

There is already a movement to circumvent China in battery supply chains in Europe and the US. China provides most of the world's precursor chemicals and batteries. Several projects in Europe and the US are aiming for domestic supply of battery chemicals.

In North America, Canadian firm First Cobalt produced its first batch of battery grade cobalt sulphate this week, a chemical almost exclusively mass produced in China. Umicore, Northvolt and BASF in Europe all plan to produce similar precursor chemicals such as Lithium-Nickel-Cobalt-Manganese-oxide (NCM) for batteries.

The battery industry is one example of a shift in global trade that was already under way. The coronavirus outbreak may become a catalyst for more such changes.

By Thomas Kavanagh