China’s property sector
China’s property sector is critical to seaborne iron ore demand. Investors in iron ore companies such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF) should keep an eye on developments in China’s property sector. CLF makes up 1.3% of the VanEck Vectors Steel ETF (SLX).
One of the factors fueling the recent rally in metals and mining shares (GNR) has been the improvement in China’s economic indicators. China’s property market has seen a rebound in 2016 on the back of government stimulus measures.
In 2016, total investments in real estate development rose 6.9% YoY (year-over-year) in China. While investments rose 6.4% for residential properties, they rose 8.7% YoY for floor space in new residential constructions. The floor area of property sales rose 22.5%.
In the months leading to the close of the year, there were signs of a slowdown in the property market in China. Nonresidential properties worth 9.9 trillion Chinese yuan were sold in 2016, translating to a rise of 36.1% YoY. This rise was lower than the 39.3% rise in the first 11 months of the year. The tightening measures put in place by the Chinese government likely started showing their effects.
The Chinese government recently vowed to control the real estate bubble. After a policymaker meeting that ended on December 16, 2016, policymakers said, “Houses are built to be inhabited, not for speculation.”
The Chinese economy is regaining some strength, but the property bubble is a major threat. The Chinese government has started taking steps to manage the bubble. Authorities have rolled out new homebuying curbs, including increased minimum down payments and the restricted use of leveraged funds to buy property.
Iron ore’s strength in 2016 can largely be attributed to the strong property market in China. A cooling market could negatively impact iron ore prices.