New | Consumer staples back in favour as rally in China’s industrials runs out

If you’re wondering where the prices of China’s industrial goods will go, stock investors may already have an answer.

The fastest gain in producer prices since the global financial crisis in 2008 has led investors and analysts to speculate that the broader increase in factory gate prices may be ending, jeopardising the profitability of cyclical companies that rely on the strength of the economy.

The rally in Chinese stocks from commodity producers to steel and coal companies is already losing steam, with Jiangxi Copper and steel maker Angang Steel falling at least 5 per cent from this year’s high.

“Producer prices may already have peaked,” said Dai Ming, a fund manager with Hengsheng Asset Management in Shanghai. “The market is worried that this round of economic recovery that is mainly driven by the restocking of industrial goods is coming to an end.”

Investors did not cheer when China’s statistics bureau announced on March 9 that the country’s producer prices jumped 7.8 per cent.

The benchmark Shanghai Composite Index responded with a 0.7 per cent loss that day. Jiangxi Copper is down 11 per cent from a February high, while China Shenhua Energy, the nation’s biggest coal producer, has dropped 7.6 per cent from its November high.

China’s industrial stocks were benefiting from six months of consecutive increases in producer prices as the government unveiled a campaign last year to eliminate excessive capacity in industries from steel and commodities to coal.