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China’s manufacturing sector continues expansion

Just less than a month after China’s GDP figures indicated an annualised 7.8% growth, the Chinese Purchasing Managers Index (PMI) lifted to a 51.4, up from a 51.1 reading in September. A reading below 50 indicates contraction, and above is expansion. This is an 18-month high, and another sign that the country is shrugging off concerns of a slowdown.

Coupled with export data showing increases in shipments of steel, for example, Australian miners and investors may be giving a sigh of relief after so much talk about the mining boom being over or even dead. At the depth of the GFC around 2008, the PMI reading went into severe contraction, but was quickly reversed with the government opening funding for major infrastructure projects to support the economy.

This led to heightened amounts of exports from Australia in the form of iron ore and coal, returning BHP Billiton (ASX: BHP) share prices to pre-GFC highs for a short time in 2011. Rio Tinto (ASX: RIO) had similar share price improvements.

Their manufacturing expansion, although just above the 50 base line, is translating into yet more Australian exports since in the early part of 2013, Chinese steelmakers were holding off on new orders and using up their stockpiles. Now that steel exports are increasing, they have to replenish their production supplies.

The increase is also noticeable in the spot price of iron ore, which has risen 17.5% from US$114/tonne to US$134/tonne since June. It is still far off from the 2011 high of $187.18/tonne, but with reported shipping volumes going out from Port Hedland higher than last year, the decrease in price from 2012 is offset by the higher unit price. Earnings for the big miners can stay about the same, yet profit margins will suffer to some extent.

Other miners such as Fortescue Metals Group (ASX: FMG) and Atlas Iron (ASX: AGO) are also ramping up production capacity to take advantage in the rebounding spot prices. Indirect beneficiaries of this are the rail transport companies like Aurizon (ASX: AZJ) and Asciano (ASX: AIO), which will be transporting more iron ore to the port for shipment.

Foolish takeaway

New information from industrial news is the reason investors take the time to read up on what is happening at the frontline of production and business while the general newspapers continue an old story, only to change it when most of the improvement and change has occurred.

For whatever stocks you own, you should spend about an hour each week for each stock reading up on what the company and its industry is doing, and learn about what economic, financial and social factors influence the company’s prospects. Without it, it’s like you are playing poker without looking at your cards.

Along with mining, oil and gas companies are ramping up in Australia. Limited oil supply and growing demand mean oil prices are likely to rise over time. Position yourself to profit from this trend now, with The Motley Fool’s brand-new FREE research report,3 Oil Stocks to Send Your Portfolio Gushing Higher”.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned

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