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Are Iron Ore Prices Reaching a Tipping Point?

PART:
1 2 3 4 5 6 7 8 9 10 11 12
Part 9
Are Iron Ore Prices Reaching a Tipping Point? PART 9 OF 12

Miners and China’s Industrial Production, Fixed-Asset Investments

Industrial production, fixed-asset investment

Industrial output measures the output of businesses involved in the industrial sector, including manufacturing, mining, and utilities. Fixed-asset investment (or FAI) is a measure of capital spending. It refers to any investment in physical assets such as real estate infrastructure and machinery that are held for more than one year.

Miners and China’s Industrial Production, Fixed-Asset Investments

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FAI is a good indicator of how much investment occurs in a country or region. It’s a closely watched indicator of construction activity in China.

Industrial production above expectations

According to monthly data released by the National Bureau of Statistics of China, China’s industrial output rose 6.3% in August 2016 compared to 6.0% in July. The figure beat market expectations of a 6.1% rise. It was the highest reading since March 2016.

The rise in industrial production was mainly due to the rise in manufacturing and electricity, gas, and water production. However, mining production fell 1.3% that month.

Fixed-assets investments

China’s FAI expanded 8.1% from January to August 2016, which was the same pace as the January–July period. Although the growth rate was better than what analysts were expecting, it was the slowest growth pace in the last 16 years.

Impact on companies

Industrial production and FAI are barometers of economic health. A rise in industrial production is a good sign for an economy. Over the last six months, we’ve seen that China’s (MCHI) (ASHR) economy is transitioning. It’s changing from a manufacturing hub to a consumption-based economy. This will be good for the Chinese economy but might not be great news for iron ore miners. Miners have expanded production to feed the country’s investment-led growth.

Iron ore prices affect companies such as Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF), as well as the SPDR S&P Metals and Mining ETF (XME).

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