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China’s Auto Demand Is Strong—What about Its Outlook?

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Nov. 30 2016, Updated 8:04 a.m. ET

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 recent trends in the Chinese automotive industry.

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Car sales rise

China’s (FXI) auto sales rose to 2.7 million in October 2016 from 2.6 million in September. These September auto sales were 19% higher than they were in the same period in 2015, and October represents the eighth consecutive month in which auto sales have risen. In the first ten months of 2016, China’s (MCHI) total sales reached 21.9 million units, which was 14% higher than the sales of 19 million units reported in the first ten months of 2015. The growth rate so far in 2016 has been substantially higher than the growth rate in 2015, when auto sales rose 4.7%, the slowest growth in three years.

Higher automotive sales in the world’s largest car market tend to bode well for global steel demand. High car sales also support seaborne iron ore players such as BHP Billiton (BHP), Rio Tinto (RIO), and Vale (VALE). ArcelorMittal (MT) is the leading steel supplier for the automotive sector. AK Steel (AKS) is a major supplier for US automotive companies.

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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. However, 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—if the tax cut is not extended, we could see some moderation in the country’s car sales.

Stalled growth, meanwhile, could have a negative effect on steelmakers and, ultimately, on iron ore producers such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF). 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 part, we’ll see whether credit-fueled property growth is sustainable in China.

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