SHANGHAI, May 25 (SMM) – HSBC Holdings PLC announced on May 24 that the preliminary HSBC China Manufacturing Purchasing Managers' Index (PMI) fell to 48.7 in May, another drop after the final PMI reading rose to 49.3 in April from the previous. This meant contraction in the manufacturing sector has yet to improve since earlier this year, and an increasingly complicated external environment also indicates it will take a long time for China's manufacturing industry to recover. As such, SMM believes that future Chinese base metals demand will likely slow.

From detailed data, the China Manufacturing Output Index rose to a seven-month high of 50.5, but the new export orders sub-index, new orders and employment data experienced contractions. Besides, inventories of finished goods expanded, reversing from a contraction in April. Inadequate demand, falling prices, and slowing economic growth showing China's macroeconomic situation were all reflected in the latest preliminary PMI data. On Thursday, the initial Markit composite PMI for the euro zone was reported to slide to 45.9 in May, the lowest since June 2009, and also below the market estimations of 46.0 and April's final reading of 46.7. German and French PMI also came in lower than expected in May, a signal their manufacturing activity also continued to contract. Continuous slowdown in May's manufacturing industries in these countries mirrored weakness in current global economy.

Both global stock and commodity markets fell on the disappointing PMI figures from the above mentioned countries while depressing market expectations over commodity demand. In addition, the US dollar keeps hitting record highs on account of the European debt crisis and Greek woes, which will negatively affect base metals market. Therefore, SMM holds the view Shanghai base metals will continue to hover weakly around current levels in the foreseeable future.