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China’s Industrial Production and Asset Investment in 1H17

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Industrial production and fixed asset investment

Industrial output measures the output of businesses involved in the industrial sector of the economy while fixed asset investment (or FAI) measures capital spending. It is a good indicator of investment occurring in a country or region.

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Industrial production

China’s industrial output rose 6.1% in November 2017 compared to November 2016. Its production growth surpassed analysts’ estimates for a rise of 6.0%. The industrial output was even higher at 6.2% in October 2017.

In 1Q17 and 2Q17, industrial output had grown at a faster clip of 6.9% year-over-year (or YoY). Some believe it to be the sign that the world’s second-largest economy has peaked in the first half of 2017. Tighter rules on production for polluting industries during winter might have also impacted industrial production.

FAI slowed down

China’s FAI also showed signs of slowing down. It grew 7.2% in the January-November period compared to 7.3% growth in the first ten months of the year.

The private sector fixed-asset investment rose 5.7% in the first 11 months of the year, which is also a decline compared to the investment in the January–October period. The slowdown in FAI in November also marked the deceleration in growth for eight consecutive months.

What does this mean for iron ore companies?

Industrial production and FAI are barometers for economic health, both of which are showing signs of a slowdown. The slowdown, however, seems to be measured and anticipated by the policymakers. They are expected to follow steady money and credit growth.

As such, industries such as steel should remain supported as far growth remains steady and within bounds. Iron ore prices should also remain supported as long as the iron ore content remains high. This should be beneficial for the companies producing high-content ore such as Rio Tinto (RIO), BHP (BHP), and Vale SA (VALE).

While Cleveland-Cliffs’ (CLF) Australian division is negatively impacted due to discounts for sub-62% iron ore, the company isn’t much worried as its main exposure is to the domestic US (SPY) (SPX) steel market.

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