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What Do China’s Steel Demand Indicators Signal for Iron Ore Prices?

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China’s property sector

The Chinese government’s efforts to rein in real estate speculation seem to be paying off. According to the latest data, housing prices in December 2017 dropped on a yearly basis in nine of the 15 major cities in China.

Some of the measures authorities have taken to quell the pricing bubble in the property market are as follows:

  • Banks in China have started raising costs for home loans and are restricting the credit supply.
  • One way the government is trying to end ever-increasing home prices is to build sustainable rental properties. It’s selling land for rental projects at steep discounts.
  • The government is also discussing the introduction of a property tax. Though that’s a while away, the government plans to intensify its efforts to tame the property market in the meantime.
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China’s auto sales

China’s auto sales (XLY) in January 2018 increased 11.6% year-over-year (or YoY) to 2.8 million units. This rise follows a 0.1% YoY increase in December 2017. The double-digit growth in January 2017 is coming from a lower base in January 2016 when sales declined 8.2% month-over-month. Overall, China’s auto sales growth in 2017 was lackluster with just 3.0% YoY growth compared to ~14% growth a year earlier. Sales in 2016 got a boost from a temporary reduction in sales tax. The China Association of Automobile Manufacturers is estimating growth of 3% in 2018.

Steel demand and miners

Slower-than-expected demand in the property and auto sectors could be bad for iron ore miners (PICK) such as Rio Tinto (RIO), Vale (VALE), BHP (BHP), and Fortescue Metals Group (FSUGY). Although Cleveland-Cliffs (CLF) contributes a very small portion to the overall seaborne iron ore trade, its stock is impacted by the changes in the iron ore prices.

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