China’s auto sales
China’s 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.
Auto sales growth slows
Vehicle sales in China, including trucks and buses, grew 4.2% to 2.5 million in March 2017. The demand for cars, SUVs (sport utility vehicles) and minivans, however, rose just 1.7% year-over-year (or YoY). To compare, sales of these vehicles jumped 6.3% YoY in the first two months of the year.
As tax incentives for car purchases were rolled back, analysts initially predicted that the consumer demand for automobiles would suffer. The rollbacks have slowed growth.
In 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 the highest seen in three years.
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.
Growth to slow?
On September 30, 2015, China announced a 50% cut to its sales tax from 10% to 5% on vehicles 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, though 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.
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 and final part of this series, we’ll discuss whether credit-fueled property growth is sustainable in China.