How Could China’s Industrial Growth Support Iron Ore in 2017?



Industrial production

Industrial output measures the output of businesses involved in the industrial sector, including manufacturing, mining, and utilities businesses. 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 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

According to monthly data released by the National Bureau of Statistics of China, China’s industrial output rose at an annualized rate of 6.0% YoY (year-over-year) in 2016, compared to a rise of 6.1% in 2015.

FAI lower than expected

China’s FAI expanded 8.1% in 2016, less than what was expected by market participants and less than the 8.3% rise it showed between January and November 2016. According to analysts polled by Reuters, the FAI’sexpansion was expected to be 8.3% in the year. In 2015, the FAI expanded 10%.

Impact on companies

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

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

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

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


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