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Should We Be Worried about China’s Auto Sales Outlook for 2017?

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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 our series on iron ore, we’ll look at recent trends in the Chinese automotive industry.

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Auto sales rise on tax break

China’s (FXI) auto sales rose to ~2.9 million in November 2016 from ~2.7 million in October 2016. Auto sales in November were 17.0% higher than the same period in 2015. The growth pace slowed down from 19.0% in October and 26.0% in September. Auto sales were higher in 2016 than in 2015 for every month except one.

In the first 11 months of 2016, China’s (MCHI) total auto sales reached 24.9 million units, which is 14.0% higher than 21.7 million units in the first 11 months of 2015. The growth rate so far in 2016 has been substantially higher than 2015 when auto sales rose 4.7%, the slowest growth in three years.

Higher automotive sales for the world’s largest auto market tend to bode well for global steel demand. High auto sales also support 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 a major supplier for US automotive companies.

Outlook

On September 30, 2015, China announced a 50.0% cut in its sales tax on autos with engines smaller than 1.6 liters. The 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 isn’t extended, we could see some moderation in the country’s auto sales.

Stalled growth could have a negative effect on steelmakers and, ultimately, 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 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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