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Should Iron Ore Investors Brace for More Downside?

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Part 8
Should Iron Ore Investors Brace for More Downside? PART 8 OF 10

How China’s Slowing Real Estate Sector Could Impact Iron Ore

China’s property sector

China’s property sector is critical to seaborne iron ore demand. Investors in iron ore companies such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF) should keep an eye on developments in China’s property sector.

How China&#8217;s Slowing Real Estate Sector Could Impact Iron Ore

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Property growth

China’s economy grew by 6.9% in 1Q17, which is its fastest growth in the last six quarters. However, economists are worried that this growth might slow down going forward, as the economy has relied too much on debt to fuel this expansion. They believe the steel industry and property market are overheating. Most market participants see the overheated property market as the single biggest risk facing the Chinese economy. They are hopeful that Chinese authorities’ measures can slow the pace.

China’s home prices have started showing signs of slowing down. Housing price growth slowed to a rise of 11.3% year-over-year in March, compared with 12.6% in November 2016. China’s big cities rolled out home purchase regulations last month.

Tightening measures and price increases

A slew of tightening measures have been launched across various cities in China to rein in asset bubbles. The country’s property sales have slowed down since these tightening measures were put in place.

The real estate sector is expected to continue to cool down in 2017, mainly due to efforts by the government to control rising property prices. Expectations of an interest rate hike should also weigh on investor sentiment in 2017. Analysts have started suggesting to take profits in Chinese real estate stocks (TAO) on concerns that the housing market has reached its peak.

Outlook weaker

Moody’s also expects a slower pace of growth for China’s property sector in 2017 due to the tighter rules. According to China Daily, Moody’s analyst Chris Wong stated that “we expect nationwide contracted sales in 2017 will be largely flat or will see a slight decline from 2016, after buoyant growth that year.” Cliffs Natural Resources makes up 1.3% of the VanEck Vectors Steel ETF (SLX).

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