uploads///Chinas Industrial Production in November

China Moves from Manufacturing to Consumption: Impact on Iron Ore

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Dec. 4 2020, Updated 10:52 a.m. ET

Industrial production

Industrial output measures the output of businesses involved in the industrial sector, including manufacturing, mining, and utilities. FAI (fixed-asset investment) is a measure of capital spending and refers to any investment in physical assets, including real estate infrastructure and machinery, held for more than one year.

FAI is also a good indicator of how much investment occurs in a country or region. It’s a closely watched indicator of construction activity in China.

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Industrial production meets expectations

According to monthly data released by the National Bureau of Statistics of China, China’s industrial output rose at an annualized rate of 6.2% YoY (year-over-year) in November 2016, compared to a rise of 6.1% in October. November’s level met market expectations of a 6.1% rise.

Fixed-asset investments

China’s FAI expanded 8.3% between January and November 2016, which was the same as the first nine months of the year. Investments by private companies rose 3.1% from January to November compared to 2.9% from January to October. However, output for the mining sector fell 2.9% in November.

Impact on companies

Industrial production and FAI are barometers of economic health. Any rise in industrial production, of course, is a good sign for an economy. Over the past few months, we’ve seen that China (MCHI) (ASHR) is transitioning from a manufacturing-based to consumption-based economy.

According to Mark Mobius, executive chair of Templeton Emerging Markets Group, this transition will take nearly five years. The change will be good for the Chinese economy, but it might not be great news for iron ore mining companies that have expanded production to feed the country’s investment-led growth.

Iron ore prices affect companies such as Rio Tinto (RIO), BHP Billiton (BHP), Vale SA (VALE), and Cliffs Natural Resources (CLF), as well as the SPDR S&P Metals and Mining ETF (XME).

In the next part, we’ll see how Chinese automobile sales could impact the demand for steel and, consequently, iron ore prices.

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