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How China’s Auto Sales Impact Iron Ore Miners

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China’s automobile sales

The automotive industry is the second-largest steel consumer after the real estate sector. In this part of our series on iron ore in 2016, we’ll look at the recent trend in the Chinese automotive industry.

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Car sales rise

China’s (FXI) auto sales rose to 2.6 million in September 2016 from 2.1 million in August. These September auto sales were 26% higher than the same period in 2015, and September represents the seventh consecutive month in which auto sales have risen. It’s the third consecutive month wherein growth was above 20%, and the YoY growth in September was China’s highest since 2013. Remember, higher automotive sales in the world’s largest car market tends to bode well for global steel demand.

High car sales also support seaborne iron ore players like 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 a 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 tax cut will be effective until the end of 2016. But the expiration of the tax cut could lead to stalling growth in 2017 and beyond. Some analysts expect China to extend the tax cut into next year, however, and if the tax cut is not extended, we could see some moderation in the country’s car sales.

Stalled growth, meanwhile, would have a negative effect on steelmakers and, ultimately, on iron ore producers like Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale SA (VALE), and Cliffs Natural Resources (CLF). Notably, the SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index, and Rio Tinto makes up 1.8% of GNR’s portfolio holdings.

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

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