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Will China’s Tax Extension Support Auto Sales in 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. We’ll also analyze how auto sales could shape up in 2017.

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Auto sales rise on tax break

Auto sales in December 2016 were 9.5% higher than they were during the same period in 2015. However, the pace of growth slowed in the month compared to previous months. Auto sales were higher in 2016 than in 2015 during every month except for one.

For 2016, China’s (FXI) total sales were 28.0 million units, 13.7% higher than its sales of 24.5 million units in 2015. The growth rate in 2016 was substantially higher than the growth rate in 2015, when auto sales rose 4.7%.

Higher automotive sales in 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 (VALE). ArcelorMittal (MT) is the leading steel supplier for the automotive sector. AK Steel (AKS) is a major supplier for US automotive companies.

Strong outlook

On September 30, 2015, China announced a 50.0% cut in its sales tax, from 10% to 5%, on autos with engines smaller than 1.6 liters. Earlier, the tax cut was effective until the end of 2016. However, China’s State Council agreed to extend the cut, albeit at a higher rate of 7.5%.

The extension will be effective until the end of 2017. In 2018, it will revert to 10%. While auto sales could be lower than they were in 2016, people are still expected to take advantage of the lower tax in 2017. Auto sales should see support in the year, which should positively affect steelmakers and, ultimately, iron ore producers such as RIO, BHP, VALE, and 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 article, we’ll see whether credit-fueled property growth is sustainable in China.

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