Why Freeport Investors Should Track China’s Automobile Industry

China is the world’s biggest automotive market, where close to 22 million vehicles are sold each year. A mid-sized vehicle has ~50 pounds of copper content.

Mohit Oberoi, CFA - Author

Apr. 2 2015, Updated 11:06 a.m. ET

uploads///china vehicle sales

China’s automobile industry

China is the world’s biggest automotive market, where close to 22 million vehicles are sold each year. Copper is highly durable and can be cast into precision shapes. This malleability makes copper and its alloys ideal for making gears and bearings. Copper radiators, motors, brakes, and bearings are used in the automobile industry, with about 50 pounds of copper content in an average mid-sized vehicle.

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Uneven car sales

The above chart shows the passenger car sales growth rate in China. Sales grew by 6.44% on a year-over-year (or YoY) basis in the latest reading in February. Sales had increased by an impressive 10.55% in January. The trend in vehicle sales has been quite uneven. China’s automotive sector continues to grow, albeit at a much slower pace over the previous years.

Investors in companies like Freeport-McMoRan (FCX), Teck Resources (TCK), and Alcoa (AA) should closely track China’s automobile industry. FCX currently forms 3.1% of the Materials Select Sector SPDR ETF (XLB), and 3.25% of the SPDR S&P Metals and Mining ETF (XME).

Disposable income

China’s improving disposable income is positive for passenger car sales. With higher income, the consumption of products like automobiles and electric appliances go up. This bodes well for the consumption of all metals.

The manufacturing sector is another major consumer of copper. Due to its corrosion resistance, copper is also used in making tanks, vessels, and pipes that are exposed to seawater. As copper is a good conductor of electricity, it is used in making power cables, motors, transformers, and other electrical equipment. It is also widely used in producing renewable energy production systems.

In the next part, we will discuss the latest trends in China’s manufacturing PMI.


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