Another month, another slew of bad news from the worlds factory floor of China.
Latest HSBC/Markit PMI manufacturing data showed activity shrink again in June, with a figure of 49.6 once again below the expansionary/contractionary watermark of 50. Manufacturing has peeked above this reading just once so far in 2015, and todays slip marks the fourth successive slide for the Asian powerhouse.
This prolonged drop comes despite repeated efforts by the Peoples Bank of China to stimulate the domestic economy, leading to fears that Beijing is set for a harder economic landing than many had feared. Consequently the outlook for the worlds natural resources sector continues to worsen, with rising production across many commodities markets adding to the sickly demand picture.
Metals markets lack lustre
Producers across the mining sector have initiated vast asset-shedding and cost-cutting measures to protect the bottom line as commodity prices drag. Naturally such measures are earnings-boosting rather than profits-driving, so quite why the City expects profits at these companies to bounce back any time soon escapes me Glencore and Antofagasta are expected to see earnings advance 15% and 6% respectively in 2015.
Indeed, prices of bellwether metal copper have rattled to three-month lows just this week around $5,650 per tonne on the back of a worsening supply/demand balance, and have shed 10% in the past month alone. So the weak Chinese data released overnight does little to assuage fears that commodity markets are not past the worst.
Oil sector continues to drown
And the same fears continue to wash over the fossil fuel segments, of course, affecting the revenues outlook for industry goliaths like Vedanta Resources (LSE: VED) as well as exploration minnows like Afren (LSE: AFR), where a dragging top line is casting a huge pall over their very existence.
Like their mining sector cousins, the City inexplicably expects the bottom line of these firms to improve markedly despite the impact of surging supply from OPEC, the US and Russia. Vedanta is predicted to see losses narrow this year, to 5.4 US cents per share from 14.2 cents in the year concluding March 2015, while Afren is anticipated to swing to earnings of 1 US cent per share in 2015 from losses of 147.2 cents in the previous period.
Still, I believe that until the worlds major resources producers begin to get a grip on surging production levels, and the global economy exhibits signs of sucking up the excess supply, investing in companies like those I have discussed remains a high-risk business.
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