China’s auto sales grow
The automotive industry is a major sector for steel consumption, just after the property sector. China has the world’s largest automotive market. Since 98% of mined iron ore goes into steelmaking, the demand for iron ore is related to China’s auto sector performance.
China’s auto sales slow down in May
The above graph shows the trend in auto sales in China (FXI). Sales fell 0.4% year-over-year in May to 1.9 million vehicles. It was the second consecutive monthly fall. Growth for May was the lowest for China’s auto sales since February 2013.
A slowdown in China’s automobile market is a negative for the global steel industry and steel players like AK Steel (AKS) and ArcelorMittal (MT). Weakness in the demand for steel ultimately impacts iron ore miners such as Rio Tinto (RIO), BHP Billiton (BHP) (BLT), Vale SA (VALE), and Cliffs Natural Resources (CLF).
Investing in the iShares MSCI Global Metals & Mining Producers ETF (PICK) is a good way to gain exposure to the iron ore sector without choosing individual companies. BHP Billiton, Rio Tinto, and Vale form 16.7%, 10.9%, and 2.8%, respectively, of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in some of these stocks.
Credit availability is an extremely important factor when assessing economic activity. In the next part of this series, we’ll look at some of China’s credit growth indicators.