• Aug. 17, 2017, 3:05 am

China April industrial profits reverse six-month falling trend

SHANGHAI (Reuters) – Chinese industrial sector profits posted their first annual rise since last September, in a sign that margin pressures may be easing at some for firms, particularly in the price sensitive energy sector.

Industrial sector profits in April rose 2.6 percent from a year earlier, National Bureau of Statistics data showed on Wednesday, but were down 1.3 percent for the year to date, reflecting the extreme weakness of growth in the first quarter.

The statistics bureau said recent interest rate and fee cuts were boosting industrial profits, but that companies still faced weak demand and falling prices.

With China’s credit and money supply data in April missing expectations on the one hand, and some signs of a bottom in the real estate sector on the other, analysts have been watching closely for any signs of a turnaround in the industrial sector.

Analysts see the recent bounce in oil prices, with the international benchmark Brent crude up around $15 between February and April, as a major factor helping profits rebound.

“The super simplistic model of Chinese corporate profits is that margin contraction or expansion aligns most closely with commodity prices, while volumes are driven more by construction activity,” said Thomas Gatley, China Corporate Analyst at the economics consultancy Gavekal Dragonomics in Beijing.

But while recovering global oil prices will be a boon for certain sectors, the real test of whether the broader industrial complex is on the mend will be seen in the extent of any recovery in output volumes.

“Currently we’re seeing some margin pick-up coming from the bounce back in oil prices, but the underlying worry on volumes is that growth continues to grind lower and lower,” Gatley said.

Marked profitability improvements last month in China’s refining and chemical sectors lend some weight to this view. Chemical sector profit growth in January-April rose 10.5 percent on the year against just 6 percent in the first quarter. The decline in refining profits, which fell 240 percent on the year in the first quarter, leveled off sharply.

Both sectors rank among the largest in China by profits.

Recovering global fuel product prices paired with cheap crude oil inventories built over the past several months may partly explain the turnaround.

“The sharp correction in crude oil prices towards the end of 2014 has created a large amount of one-off inventory losses,” wrote analysts at the Malaysian bank Maybank in a note on the Chinese oil sector on May 5.

“Part of these losses will be recouped, as low-cost raw materials become a tail wind in 2015.”

(Reporting by Nathaniel Taplin; Editing by Clarence Fernandez, Jacqueline Wong & Shri Navaratnam)

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