China's June factory price inflation subdued on modest raw materials recovery

EghtesadOnline: China's producer price inflation was unchanged in June and remained well off highs seen earlier this year, amid lingering oversupply issues in the steel sector and as signs of economic weakness weighed on the outlook for prices.

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10 July 2017

The producer price index (PPI) rose 5.5 percent in June from a year earlier, the National Bureau of Statistics (NBS) said on Monday. This was in line with analyst forecasts and unchanged from the previous month, Reuters reported.

Prices of raw materials are making a modest recovery, helped by stronger futures prices in China over the past few weeks, after an earlier hit taken from a broader cooling in economic activity since March.

China's June consumer prices rose 1.5 percent from a year earlier, in line with market expectations and May's reading, the NBS said, with food prices continuing their declines albeit at a slower pace.

There are some concerns among analysts that price pressures could weaken throughout the rest of the year as economic fundamentals soften.

"The upshot is that, having eased in previous months, price pressures appear to have stabilized in June," Julian Evans-Pritchard from Capital Economics in Singapore wrote in a note.

"Nonetheless, with slowing credit growth likely to weigh on economic activity in coming quarters we think that, volatility in food prices aside, inflation still has further to fall. This will disappoint those hoping for a sustained period of reflation that could help to erode corporate debt burdens."

Food prices, the biggest component of the consumer price index, fell at a slower 1.2 percent from the previous year, after sliding 1.6 percent in May and 3.5 percent in April.

"Falling food prices can be attributed to a high build-up of food reserves and seasonal factors," Zhu Baoliang, chief economist at the State Information Center (SIC), said, according to a story published on Monday in China's Financial News newspaper, affiliated with the People's Bank of China (PBOC).

Tepid inflation comes despite signs of a pickup in factory activity. China's manufacturing sector expanded at the quickest pace in three months in June, buoyed by strong production and new orders.

Meanwhile, spot iron ore and construction steel prices have risen as investors continued to focus on China's capacity cutbacks and industrial upgrade in the steel sector.

"High margins after the government's effort to eliminate low-grade steel are enticing mills to produce more steel, which increases the need for iron ore," said Zou Mingdong, Shanghai-based steel manager at Zhongcai Merchants Investment Group.

"However, the rising price doesn't change the fundamental situation of oversupply and weak demand."

China's biggest steel maker, Baoshan Iron & Steel, cut its main steel products prices for May and June after a long series of increases.

On a month-on-month basis, the PPI fell 0.2 percent in June.

China is targeting economic growth of around 6.5 percent this year and inflation of 3 percent. Chinese Premier Li Keqiang said in a speech at the World Economic Forum that China is capable of achieving its full-year growth target and controlling systemic risks despite challenges.