Metal Mining Stocks Benefit on Low China PMI - Analyst Blog

The metal and mining sector is highly dependent on China's — the largest consumer of steel — economic growth. Reportedly, China's steel industry has overcapacity of 300 million tons, which may pose a great threat to the global steel industry.

Recently, a private survey by HSBC Holdings plc (HSBC) quantified a lower-than-expected Purchasing Managers' Index (PMI) for China in March 2014. A PMI score of 50 and above is considered to be favorable. However, the PMI for China fell to an eight-month low of 48.1 in March, declining from 48.5 a month ago. The primary reason for the decline is assumed to be weaker domestic demand, where export orders increased sequentially.

Generally, the PMI for China increases sequentially in March, due to the Chinese New Year. However, this does not seem to be the case here, leading to disappointment across indices.

Following the PMI data release, the FTSE 100 Index fell 0.6% to 6,520.39 as major players in the index recorded a fall. Although, the preliminary reports from HSBC expect a rebound in the Chinese economy, the expected pace and quantum is limited.

However, a day later, investors' confidence received a boost from improved U.S. consumer-confidence data, which reached a six-year high. According to the Conference Board, the consumer confidence reached 82.3 in March, from 78.3 in February.

Investors expect the U.S. markets to improve given the record consumer-confidence data. Moreover, it is believed that the lower PMI will compel the Chinese government to introduce measures to enhance growth and stability in its economy.

The shares likely to benefit from the economic growth recorded an increase in the share prices. London-based Rio Tinto plc RIO witnessed a hike of 3.52% to $54.65 on Mar 25, while Australia-based BHP Billiton Ltd's BHP share price increased 2.76% to $66.86 the same day.