The latest round of Chinese industrial activity and real estate data for July were positive for commodities like coal and iron ore. Of particular interest is the rebound on housing construction in the month. There was a concerning weaker trend developing in the residential buildings under construction data in the 3 months to June, but July saw a nice bounce. Sales continue to hold up very well.
Strength in this area of activity has ensured that steel production has been maintained at a healthy rate, growing 6.1%YoY. Demand for steel has proven to be much stronger than expected in 2013 thus far and even a flat result for the rest of the year will still see adjustment to many raw materials models.
Many are increasingly sceptical of the veracity of Chinese data. But these numbers make total sense in light of performance of iron ore prices.
The good news for thermal coal in these data was the ongoing improvement in power generation, which rose to 8.1%YoY. Given coal stocks are starting to deplete to levels where IPPs will be looking to boost orders to first end destocking and secondly build stocks ahead of winter. This process should being in September and prices could easily jump ~10-15%.
The big question is can these upside surprises last given the major crunch being delivered to some parts of financing sector. The Social Finance data for July were again weak, with short term bill financing again shrinking and loans via wealth management products fading also.
This is precisely what policy makers want, with rate of growth now down 34%YoY in the last two months. Remember these are flow rather than stock data, so growth rates should be viewed as the second derivative of credit.
Perhaps the fall out in real activity is yet to come. That said, it is entirely possible that stamping out certain types of financing may have a more muted impact on growth given they didn't seem to do much for the real economy in the first place.
The strength of these data leave markets in a tricky position. The upside in activity today will mean the level of activity will be stronger than expected, so high prices for iron ore look more sustainable and the prospects for an improvement in coal look even better. It is tricky though it carry this optimism into 2014, when the steel economy will probably face stronger headwinds than this year.
