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Why the Drop in China’s Car Sales Could Affect ArcelorMittal

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China’s car sales

The automobile sector is the second biggest steel consumer in China. So it’s crucial for steel investors to track the activity in China’s automobile industry. China is the world’s largest automotive market. Vehicle sales in China are expected to exceed 24 million units in 2015.

China’s car sales drop

The above chart shows the trend in China’s passenger car sales. The data are released by the China Association of Automobile Manufacturers. In June, China’s passenger car sales fell 3.2% compared to last year. This is the first yearly decline in China’s passenger car sales since February 2013.

ArcelorMittal’s (MT) joint venture in China rolled out its first coil in 1Q15. The plant will have an annual production capacity of around 3 million metric tons. It will produce steel for high-end applications in the automotive industry.

ArcelorMittal will supply steel to international automakers and first-tier Chinese car manufacturers from this plant. The slowdown in China’s automobile sector could negatively impact ArcelorMittal. Auto component manufacturers like Delphi Automotive (DLPH) could also be negatively impacted by the slowdown in China’s automobile market.

AK Steel (AKS) and Allegheny Technologies (ATI) are leading suppliers to US automobile companies. AK Steel currently forms 2.87% of the SPDR S&P Metals and Mining ETF (XME).

China’s stock market crash

When stock markets crash, like we’ve seen over the last month or so in China, investor sentiment is hurt. Stock market corrections generally translate into a general sense of pessimism about the economy. Sales of consumer discretionary goods like automobiles are negatively impacted if consumer confidence takes a dip.

In the next part, we’ll see how China’s construction activity is shaping up.

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