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How Steps China Is Taking to Boost Auto Sales Affect Steelmakers

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China’s auto sales

The automotive industry is the second-largest steel consumer after the real estate sector. In this part of the series, we’ll look at the recent trend in the Chinese automotive industry.

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Car sales rise

China’s passenger car sales rose to 1.6 million in July 2016, a year-over-year (or YoY) increase of 26.5%. This was the highest growth rate in three-and-a-half years. The higher automotive sales in the world’s largest car market seem to bode well for global steel demand.

This also supports seaborne iron ore players such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE). ArcelorMittal (MT) is the leading steel supplier for the automotive sector. AK Steel (AKS) is another major supplier for US automotive companies.

Outlook

On September 30, 2015, China announced a 50% cut in its sales tax on cars with engines smaller than 1.6 liters. This cut will be effective until the end of 2016. Its expiration could lead to stalling growth in 2017 and beyond. Although 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 Tinto forms 1.8% of its holdings.

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

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