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Why China’s Auto Sales May Lose Momentum in 2017

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China’s auto sales

The automotive industry is a major sector for steel consumption, just after the property sector.

China has the world’s largest automotive market. Because 98% of mined iron ore goes into steelmaking, the demand for iron ore is related to China’s auto sector performance.

In June 2016, China’s (FXI) auto sales came in at 2.07 million compared to 2.09 million in May. However, June’s sales were 14.8% higher compared to the same period last year, and sales increased at a faster pace in June than in May.

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First half of 2016

In the first half of 2016, auto sales rose by 8% to 12.8 million from 11.9 million in the same period in 2015. However, analysts believe that most of this growth was due to weak sales last year, the benefit of which will continue for another two months.

Another catalyst that’s been driving auto sales this year is the 50% cut in sales tax on cars with engines smaller than 1.6 liters that China announced last year. This cut will be effective until the end of 2016. Its expiration could lead to stalling growth in 2017 and beyond.

Impact on steel and iron ore

While auto demand has picked up recently due to discounts and tax cuts, the overall pace of sales remains slow.

Stalled growth would have a negative effect on steelmakers and ultimately on iron ore producers such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale SA (VALE), and Cliffs Natural Resources (CLF).

The SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index. Rio forms 1.8% of its holdings.

In the next part of our series, we’ll see if credit-fueled property growth is sustainable in China.

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