Why China’s Slowing Auto Demand Hurts Iron Ore

China’s auto demand

China’s automobile industry is the second-largest steel consumer, after the real estate sector. Auto sales in China fell by 0.10% to 2.1 million units in May 2017. This fall was the second consecutive monthly drop in sales, which has happened for the first time since 2015. 2016 was a good year for auto sales. They grew at their fastest pace in three years. A sales tax cut spurred higher auto sales in 2016. A 50% cut in sales tax from, 10% to 5% on vehicles with engines smaller than 1.6 liters, also spurred auto sales in 2016. In 2017, the cut is still in place, though at a higher rate of 7.5%. As tax incentives for car purchases were rolled back, demand has shown signs of cooling down.

Why China’s Slowing Auto Demand Hurts Iron Ore

In the first five months of 2017, auto sales have risen by just 3.7% YoY. Growth in the same period last year was 13.7%.

Growth to slow?

According to CAAM (the China Association of Automobile Manufacturers), the current downturn in auto sales is expected to continue through July and August. CAAM forecasts 2017 auto sales growth at 5.0%. Lower auto sales in the world’s largest auto market don’t bode well for global steel (SLX) demand. Lower auto sales, ultimately affecting iron ore demand, should be negative for seaborne iron ore players such as Rio Tinto (RIO), Vale (VALE), and BHP (BHP). ArcelorMittal (MT) and AK Steel (AKS) are also exposed to the automotive sector. A slowdown in sales should also affect them negatively.