Jalan2Economics: Asian PMIs: Bad news for commodity-lined stocks


by Harry Su - Head of Research Bahana Securities


With Indonesia’s Purchasing Managers Index (PMI) having been newly established, we rely on PMIs (exhibit 2) around the region to provide us with a gauge on Asia’s manufacturing sector and global growth in general.

Recently released PMIs for Asia were undoubtedly weak.  With global growth likely to remain weak, exacerbated by the condition in the euro zone, we expect the manufacturing sector across the region to be in doldrums in the remaining part of this year and at least into the early part of 2013. 


Of the four countries to have reported June PMIs, the readings were mostly disappointing at below 50, the level which separates contraction from expansion.  Australia reported the strongest PMI in June with the reading above May’s level, but remaining below 50, which is consistent with continued weakness in global economies.

For China, its PMI is barely above 50, and has been on the decline since March/April period.  For Korea, the manufacturing index was also disappointing with the headline number falling to 86, well below 100.  Other recent data from Korea, including for exports and retail sales have also been weak.    

Overall, the poor PMIs underline the challenges confronting the region in our view.  In spite of possible easing policies remaining in the arsenal of most of the region’s central banks, it is clear that Asia’s trade-dependent economies will experience a challenging second half of the year and into the early part of next year. 

This does not bode well for global commodity prices in general as displayed in exhibit 2.  With the exception of soft commodities like corn, wheat, sugar, soybean and rice, most hard commodities associated with manufacturing are in the red this year.  We note that coal price has declined nearly 22 percent year-to-date, followed by nickel (-15 percent), oil (-6 percent) and steel (-5 percent). 

Lower commodity prices will adversely impact earnings of Indonesian commodity companies.  That said, we expect margin deterioration leading up to the releases of second quarter earnings at the end of this month.  Be warned. 

In 2H12, with persistent depressed PMI readings around the region, we expect weak selling prices on commodities to apply downward pressures on companies’ margins.  Our sensitivity analysis reveals that with every 10% decline in commodity prices, earnings of commodity exporters will come down by around 25-30 percent. 
Therefore, we continue to advise investors to trim exposure in commodity-related stocks with severe exposure towards global economic uncertainties in favor of domestic plays (e.g. infrastructure and consumer sectors), which can shield against external volatilities.

   
Exhibit 1. Commodity prices

YTD
2011
Since peak

YTD
2011
Since peak

(%)
(%)
(%)

(%)
(%)
(%)
Corn  (USD/Mtn)
20.0
6.0
(3.1)
Iron ore (USD/Mtn)
(2.2)
(18.6)
(29.4)
Wheat (USD/Mtn)
17.5
(14.6)
(12.7)
Pulp (USD/Mtn)
(2.6)
(12.1)
(17.1)
Sugar (USD/Mtn)
9.0
(1.0)
(19.3)
Aluminium (USD/Mtn)
(4.1)
(19.6)
(42.6)
Soybean (USD/ Mtn)
3.6
(8.0)
(20.3)
Steel (USD/Mtn)
(4.7)
(7.6)
(32.5)
Rice (IDR/Kg)
1.2
14.1
(2.4)
Oil (USD/barrel)
(6.1)
13.0
(31.5)
Milk (USD/Mtn)
0.9
12.0
(10.6)
Rubber (USD/Mtn)
(11.3)
(34.6)
(47.9)
Gold (USD/oz.)
0.8
11.3
(17.1)
Nickel (USD/Mtn)
(14.6)
(22.8)
(70.4)
CPO (USD/Mtn-CIF)
(1.2)
(19.1)
(26.3)
Coffee (USD/ Mtn)
(14.9)
(5.2)
(35.6)
Copper (USD/Mtn)
(1.3)
(20.5)
(26.4)
Coal (USD/Mtn)
(21.7)
(8.3)
(54.3)
Tins (USD/Mtn)
(2.0)
(27.9)
(42.2)
Cotton (USD/Mtn)
(22.8)
(35.7)
(67.0)
Corn  (USD/Mtn)
20.0
6.0
(3.1)
Iron ore (USD/Mtn)
(2.2)
(18.6)
(29.4)
Wheat (USD/Mtn)
17.5
(14.6)
(12.7)
Pulp (USD/Mtn)
(2.6)
(12.1)
(17.1)
Source: Bloomberg



Exhibit 2. Manufacturing Purchasing Managers Index
Country
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Australia
51.6
51.3
49.5
43.9
42.4
47.2
China
50.5
51.0
53.1
53.3
50.4
50.2
Japan
50.7
50.5
51.1
50.7
50.7
49.9
South Korea*
79.0
81.0
84.0
85.0
90.0
86.0
Source: Bloomberg, *BSI Manufacturing index

For more info please contact
Research Division Bahana Securities 
Graha CIMB Niaga, 19th Floor 
Jl. Jend Sudirman Kab 58, Jakarta, Indonesia
Phone: 62 21 250 5081
Fax : 62 21 522 6049